Is Shenzhen Overseas Chinese TownLtd (SZSE:000069) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 can see that Shenzhen Overseas Chinese Town Co.,Ltd. (SZSE:000069) does use debt in its business. But the more important question is: how much risk is that debt creating?

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 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. 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.

View our latest analysis for Shenzhen Overseas Chinese TownLtd

What Is Shenzhen Overseas Chinese TownLtd's Debt?

The chart below, which you can click on for greater detail, shows that Shenzhen Overseas Chinese TownLtd had CN¥131.3b in debt in September 2024; about the same as the year before. However, because it has a cash reserve of CN¥31.4b, its net debt is less, at about CN¥99.9b.

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

According to the last reported balance sheet, Shenzhen Overseas Chinese TownLtd had liabilities of CN¥165.1b due within 12 months, and liabilities of CN¥98.3b due beyond 12 months. Offsetting these obligations, it had cash of CN¥31.4b as well as receivables valued at CN¥47.4b due within 12 months. So it has liabilities totalling CN¥184.6b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥24.3b 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'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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Shenzhen Overseas Chinese TownLtd had a loss before interest and tax, and actually shrunk its revenue by 33%, to CN¥53b. That makes us nervous, to say the least.

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. Indeed, it lost CN¥2.4b at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. 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 burned through CN¥1.1b in the last year. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shenzhen Overseas Chinese TownLtd is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.