Does Shenzhen Overseas Chinese TownLtd (SZSE:000069) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Shenzhen Overseas Chinese Town Co.,Ltd. (SZSE:000069) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shenzhen Overseas Chinese TownLtd

How Much Debt Does Shenzhen Overseas Chinese TownLtd Carry?

As you can see below, at the end of March 2024, Shenzhen Overseas Chinese TownLtd had CN¥138.3b of debt, up from CN¥118.6b a year ago. Click the image for more detail. However, it also had CN¥36.6b in cash, and so its net debt is CN¥101.7b.

How Healthy Is Shenzhen Overseas Chinese TownLtd's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Overseas Chinese TownLtd had liabilities of CN¥155.2b falling due within a year, and liabilities of CN¥123.2b due beyond that. Offsetting this, it had CN¥36.6b in cash and CN¥46.5b in receivables that were due within 12 months. So it has liabilities totalling CN¥195.3b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥16.3b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Shenzhen Overseas Chinese TownLtd would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenzhen Overseas Chinese TownLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Shenzhen Overseas Chinese TownLtd had a loss before interest and tax, and actually shrunk its revenue by 25%, to CN¥58b. To be frank that doesn't bode well.

Caveat Emptor

While Shenzhen Overseas Chinese TownLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥608m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥6.5b in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. Case in point: We've spotted 1 warning sign for Shenzhen Overseas Chinese TownLtd you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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