Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Shenzhen Overseas Chinese Town Co.,Ltd. (SZSE:000069) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Shenzhen Overseas Chinese TownLtd Carry?

The chart below, which you can click on for greater detail, shows that Shenzhen Overseas Chinese TownLtd had CN¥131.3b in debt in September 2024; about the same as the year before. However, because it has a cash reserve of CN¥31.4b, its net debt is less, at about CN¥99.9b.

How Healthy Is Shenzhen Overseas Chinese TownLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenzhen Overseas Chinese TownLtd had liabilities of CN¥165.1b due within 12 months and liabilities of CN¥98.3b due beyond that. Offsetting these obligations, it had cash of CN¥31.4b as well as receivables valued at CN¥47.4b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥184.6b.

The deficiency here weighs heavily on the CN¥24.9b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Shenzhen Overseas Chinese TownLtd would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shenzhen Overseas Chinese TownLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Shenzhen Overseas Chinese TownLtd made a loss at the EBIT level, and saw its revenue drop to CN¥53b, which is a fall of 33%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Shenzhen Overseas Chinese TownLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥2.4b. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the fact is that it incinerated CN¥1.1b of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Shenzhen Overseas Chinese TownLtd has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.