Is Shenzhen Overseas Chinese TownLtd (SZSE:000069) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Shenzhen Overseas Chinese Town Co.,Ltd. (SZSE:000069) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shenzhen Overseas Chinese TownLtd

How Much Debt Does Shenzhen Overseas Chinese TownLtd Carry?

As you can see below, Shenzhen Overseas Chinese TownLtd had CN¥131.3b of debt at September 2024, down from CN¥137.4b a year prior. However, it does have CN¥31.4b in cash offsetting this, leading to net debt of about CN¥99.9b.

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

The latest balance sheet data shows that Shenzhen Overseas Chinese TownLtd had liabilities of CN¥165.1b due within a year, and liabilities of CN¥98.3b falling due after that. On the other hand, it had cash of CN¥31.4b and CN¥47.4b worth of receivables due within a year. So its liabilities total CN¥184.6b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥20.2b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Shenzhen Overseas Chinese TownLtd would likely require a major re-capitalisation if it had to pay its creditors today. 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 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.

Over 12 months, Shenzhen Overseas Chinese TownLtd made a loss at the EBIT level, and saw its revenue drop to CN¥53b, which is a fall of 33%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Shenzhen Overseas Chinese TownLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥2.4b at the EBIT level. 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. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it burned through CN¥1.1b in the last year. So is this a high risk stock? We think so, and we'd avoid it. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shenzhen Overseas Chinese TownLtd you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.