Is Shenzhen Worldunion Group (SZSE:002285) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Shenzhen Worldunion Group Incorporated (SZSE:002285) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Shenzhen Worldunion Group

How Much Debt Does Shenzhen Worldunion Group Carry?

The image below, which you can click on for greater detail, shows that Shenzhen Worldunion Group had debt of CN¥366.4m at the end of September 2023, a reduction from CN¥936.6m over a year. However, its balance sheet shows it holds CN¥1.67b in cash, so it actually has CN¥1.30b net cash.

How Strong Is Shenzhen Worldunion Group's Balance Sheet?

According to the last reported balance sheet, Shenzhen Worldunion Group had liabilities of CN¥2.39b due within 12 months, and liabilities of CN¥114.8m due beyond 12 months. Offsetting this, it had CN¥1.67b in cash and CN¥1.81b in receivables that were due within 12 months. So it actually has CN¥974.1m more liquid assets than total liabilities.

This surplus suggests that Shenzhen Worldunion Group is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Shenzhen Worldunion Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shenzhen Worldunion 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 Worldunion Group made a loss at the EBIT level, and saw its revenue drop to CN¥3.6b, which is a fall of 21%. That makes us nervous, to say the least.

So How Risky Is Shenzhen Worldunion Group?

While Shenzhen Worldunion Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥563m. 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. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Shenzhen Worldunion Group is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.