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Shenzhen Worldunion Group (SZSE:002285) Has Debt But No Earnings; Should You Worry?
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.' 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 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?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Shenzhen Worldunion Group
What Is Shenzhen Worldunion Group's Debt?
You can click the graphic below for the historical numbers, but it shows that Shenzhen Worldunion Group had CN¥21.0m of debt in September 2024, down from CN¥366.4m, one year before. But it also has CN¥1.03b in cash to offset that, meaning it has CN¥1.01b net cash.
A Look At Shenzhen Worldunion Group's Liabilities
The latest balance sheet data shows that Shenzhen Worldunion Group had liabilities of CN¥1.63b due within a year, and liabilities of CN¥49.3m falling due after that. Offsetting these obligations, it had cash of CN¥1.03b as well as receivables valued at CN¥1.41b due within 12 months. So it actually has CN¥767.9m more liquid assets than total liabilities.
This surplus suggests that Shenzhen Worldunion Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
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%. 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¥40m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. 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 learn about the 2 warning signs we've spotted with Shenzhen Worldunion Group (including 1 which is potentially serious) .
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.
About SZSE:002285
Excellent balance sheet and slightly overvalued.