Warren Buffett famously said, '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. As with many other companies Shenzhen Overseas Chinese Town Co.,Ltd. (SZSE:000069) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shenzhen Overseas Chinese TownLtd

What Is Shenzhen Overseas Chinese TownLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Shenzhen Overseas Chinese TownLtd had CN¥138.0b in debt in June 2023; about the same as the year before. However, it also had CN¥44.3b in cash, and so its net debt is CN¥93.7b.

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

We can see from the most recent balance sheet that Shenzhen Overseas Chinese TownLtd had liabilities of CN¥177.9b falling due within a year, and liabilities of CN¥122.8b due beyond that. On the other hand, it had cash of CN¥44.3b and CN¥42.6b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥213.8b.

This deficit casts a shadow over the CN¥34.6b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Shenzhen Overseas Chinese TownLtd would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Shenzhen Overseas Chinese TownLtd had a loss before interest and tax, and actually shrunk its revenue by 17%, to CN¥80b. We would much prefer see growth.

Caveat Emptor

While Shenzhen Overseas Chinese TownLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥5.0b. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥12b in the last year. So we're not very excited about owning this stock. Its too risky for us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shenzhen Overseas Chinese TownLtd is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.