David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Shenzhen Worldunion Group Incorporated (SZSE:002285) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Shenzhen Worldunion Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Shenzhen Worldunion Group had CN¥73.4m of debt in March 2024, down from CN¥671.3m, one year before. But it also has CN¥1.25b in cash to offset that, meaning it has CN¥1.18b net cash.
How Strong Is Shenzhen Worldunion Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Shenzhen Worldunion Group had liabilities of CN¥1.80b due within 12 months and liabilities of CN¥123.1m due beyond that. Offsetting this, it had CN¥1.25b in cash and CN¥1.43b in receivables that were due within 12 months. So it can boast CN¥757.3m more liquid assets than total liabilities.
It's good to see that Shenzhen Worldunion Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Shenzhen Worldunion Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Shenzhen Worldunion Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Shenzhen Worldunion Group made a loss at the EBIT level, and saw its revenue drop to CN¥3.1b, which is a fall of 19%. That's not what we would hope to see.
So How Risky Is Shenzhen Worldunion Group?
Although Shenzhen Worldunion Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥247m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shenzhen Worldunion Group you should know about.
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.