We Think Shine Justice (ASX:SHJ) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Shine Justice Ltd (ASX:SHJ) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shine Justice

What Is Shine Justice's Debt?

The chart below, which you can click on for greater detail, shows that Shine Justice had AU$47.0m in debt in June 2021; about the same as the year before. However, it does have AU$56.0m in cash offsetting this, leading to net cash of AU$9.03m.

How Healthy Is Shine Justice's Balance Sheet?

We can see from the most recent balance sheet that Shine Justice had liabilities of AU$129.9m falling due within a year, and liabilities of AU$188.1m due beyond that. Offsetting this, it had AU$56.0m in cash and AU$257.4m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Shine Justice's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the AU$270.0m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Shine Justice also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Shine Justice grew its EBIT by 11% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shine Justice can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shine Justice has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Shine Justice produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Shine Justice has AU$9.03m in net cash. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in AU$45m. So is Shine Justice's debt a risk? It doesn't seem so to us. 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. For example - Shine Justice has 2 warning signs we think you should be aware of.

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.

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.

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