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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Shenzhen Worldunion Group Incorporated (SZSE:002285) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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 think about a company's use of debt, we first look at cash and debt together.

What Is Shenzhen Worldunion Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen Worldunion Group had CN¥21.0m of debt in September 2024, down from CN¥366.4m, one year before. But it also has CN¥1.03b in cash to offset that, meaning it has CN¥1.01b net cash.

How Strong Is Shenzhen Worldunion Group's Balance Sheet?

According to the last reported balance sheet, Shenzhen Worldunion Group had liabilities of CN¥1.63b due within 12 months, and liabilities of CN¥49.3m due beyond 12 months. On the other hand, it had cash of CN¥1.03b and CN¥1.41b worth of receivables due within a year. So it actually has CN¥767.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Worldunion Group could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 you can't view debt in total isolation; since Shenzhen Worldunion Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Shenzhen Worldunion Group had a loss before interest and tax, and actually shrunk its revenue by 30%, to CN¥2.5b. That makes us nervous, to say the least.

So How Risky Is Shenzhen Worldunion Group?

While Shenzhen Worldunion Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥40m. 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 mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For example, we've discovered 2 warning signs for Shenzhen Worldunion Group that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.