Shifeng Cultural Development (SZSE:002862) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, '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 note that Shifeng Cultural Development Co., Ltd. (SZSE:002862) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Shifeng Cultural Development

What Is Shifeng Cultural Development's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Shifeng Cultural Development had CN¥195.3m of debt, an increase on CN¥184.5m, over one year. However, it also had CN¥37.8m in cash, and so its net debt is CN¥157.5m.

How Strong Is Shifeng Cultural Development's Balance Sheet?

The latest balance sheet data shows that Shifeng Cultural Development had liabilities of CN¥182.7m due within a year, and liabilities of CN¥64.3m falling due after that. Offsetting these obligations, it had cash of CN¥37.8m as well as receivables valued at CN¥168.3m due within 12 months. So it has liabilities totalling CN¥40.9m more than its cash and near-term receivables, combined.

This state of affairs indicates that Shifeng Cultural Development's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥4.24b company is short on cash, but still worth keeping an eye on the balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shifeng Cultural Development'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.

In the last year Shifeng Cultural Development wasn't profitable at an EBIT level, but managed to grow its revenue by 50%, to CN¥404m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Shifeng Cultural Development still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥19m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥28m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Shifeng Cultural Development 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.