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

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 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 Special Economic Zone Real Estate & Properties (Group) Co., Ltd. (SZSE:000029) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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?

The image below, which you can click on for greater detail, shows that Shenzhen Special Economic Zone Real Estate & Properties (Group) had debt of CN¥117.0m at the end of September 2024, a reduction from CN¥243.3m over a year. However, its balance sheet shows it holds CN¥1.52b in cash, so it actually has CN¥1.40b net cash.

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

Zooming in on the latest balance sheet data, we can see that Shenzhen Special Economic Zone Real Estate & Properties (Group) had liabilities of CN¥2.61b due within 12 months and liabilities of CN¥65.3m due beyond that. On the other hand, it had cash of CN¥1.52b and CN¥135.7m worth of receivables due within a year. So it has liabilities totalling CN¥1.02b more than its cash and near-term receivables, combined.

Given Shenzhen Special Economic Zone Real Estate & Properties (Group) has a market capitalization of CN¥13.8b, it's hard to believe these liabilities pose much threat. 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. There's no doubt that we learn most about debt from the balance sheet. But it is Shenzhen Special Economic Zone Real Estate & Properties (Group)'s earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Shenzhen Special Economic Zone Real Estate & Properties (Group) had a loss before interest and tax, and actually shrunk its revenue by 17%, to CN¥385m. That's not what we would hope to see.

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¥970m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. We've identified 1 warning sign with Shenzhen Special Economic Zone Real Estate & Properties (Group) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.