Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Shenzhen Special Economic Zone Real Estate & Properties (Group) Co., Ltd. (SZSE:000029) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Shenzhen Special Economic Zone Real Estate & Properties (Group) Carry?

As you can see below, at the end of March 2024, Shenzhen Special Economic Zone Real Estate & Properties (Group) had CN¥227.0m of debt, up from CN¥121.6m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.66b in cash, leading to a CN¥1.43b net cash position.

How Healthy Is Shenzhen Special Economic Zone Real Estate & Properties (Group)'s Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Special Economic Zone Real Estate & Properties (Group) had liabilities of CN¥2.51b falling due within a year, and liabilities of CN¥182.4m due beyond that. On the other hand, it had cash of CN¥1.66b and CN¥94.4m worth of receivables due within a year. So its liabilities total CN¥937.2m more than the combination of its cash and short-term receivables.

Given Shenzhen Special Economic Zone Real Estate & Properties (Group) has a market capitalization of CN¥9.92b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Shenzhen Special Economic Zone Real Estate & Properties (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 Special Economic Zone Real Estate & Properties (Group)'s earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Shenzhen Special Economic Zone Real Estate & Properties (Group) reported revenue of CN¥481m, which is a gain of 2.1%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Shenzhen Special Economic Zone Real Estate & Properties (Group)?

While Shenzhen Special Economic Zone Real Estate & Properties (Group) lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥1.1b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Shenzhen Special Economic Zone Real Estate & Properties (Group) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.