Is Shenzhen Special Economic Zone Real Estate & Properties (Group) (SZSE:000029) A Risky Investment?

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. Importantly, Shenzhen Special Economic Zone Real Estate & Properties (Group) Co., Ltd. (SZSE:000029) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shenzhen Special Economic Zone Real Estate & Properties (Group)

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. However, its balance sheet shows it holds CN¥1.66b in cash, so it actually has CN¥1.43b net cash.

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

The latest balance sheet data shows that Shenzhen Special Economic Zone Real Estate & Properties (Group) had liabilities of CN¥2.51b due within a year, and liabilities of CN¥182.4m falling due after that. Offsetting these obligations, it had cash of CN¥1.66b as well as receivables valued at CN¥94.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥937.2m.

Of course, Shenzhen Special Economic Zone Real Estate & Properties (Group) has a market capitalization of CN¥10.1b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Shenzhen Special Economic Zone Real Estate & Properties (Group) also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shenzhen Special Economic Zone Real Estate & Properties (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.

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 although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shenzhen Special Economic Zone Real Estate & Properties (Group) 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.