Is Shenzhen Worldunion Group (SZSE:002285) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Shenzhen Worldunion Group Incorporated (SZSE:002285) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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 think about a company's use of debt, we first look at cash and debt together.

What Is Shenzhen Worldunion Group's Debt?

As you can see below, Shenzhen Worldunion Group had CN¥21.0m of debt at September 2024, down from CN¥366.4m a year prior. However, it does have CN¥1.03b in cash offsetting this, leading to net cash of CN¥1.01b.

How Strong Is Shenzhen Worldunion Group's Balance Sheet?

According to the last reported balance sheet, Shenzhen Worldunion Group had liabilities of CN¥1.63b due within 12 months, and liabilities of CN¥49.3m due beyond 12 months. Offsetting this, it had CN¥1.03b in cash and CN¥1.41b in receivables that were due within 12 months. So it actually has CN¥767.9m 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. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Shenzhen Worldunion Group has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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.

Check out our latest analysis for Shenzhen Worldunion Group

Over 12 months, Shenzhen Worldunion Group made a loss at the EBIT level, and saw its revenue drop to CN¥2.5b, which is a fall of 30%. To be frank that doesn't bode well.

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¥40m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. To that end, you should be aware of the 1 warning sign we've spotted with Shenzhen Worldunion Group .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.