Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Shenzhen Overseas Chinese Town Co.,Ltd. (SZSE:000069) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Shenzhen Overseas Chinese TownLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shenzhen Overseas Chinese TownLtd had CN¥138.3b of debt, an increase on CN¥118.6b, over one year. However, it does have CN¥36.6b in cash offsetting this, leading to net debt of about CN¥101.7b.

A Look At Shenzhen Overseas Chinese TownLtd's Liabilities

The latest balance sheet data shows that Shenzhen Overseas Chinese TownLtd had liabilities of CN¥155.2b due within a year, and liabilities of CN¥123.2b falling due after that. Offsetting this, it had CN¥36.6b in cash and CN¥46.5b in receivables that were due within 12 months. So it has liabilities totalling CN¥195.3b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥15.9b 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'd watch its balance sheet closely, without a doubt. After all, Shenzhen Overseas Chinese TownLtd would likely require a major re-capitalisation if it had to pay its creditors today. 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.

Over 12 months, Shenzhen Overseas Chinese TownLtd made a loss at the EBIT level, and saw its revenue drop to CN¥58b, which is a fall of 25%. To be frank that doesn't bode well.

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. Indeed, it lost CN¥608m at the EBIT level. 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. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥6.5b 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Shenzhen Overseas Chinese TownLtd is showing 1 warning sign in our investment analysis , you should know about...

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.