Here's Why Shenzhen Tellus Holding (SZSE:000025) Can Manage Its Debt Responsibly

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.' 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. As with many other companies Shenzhen Tellus Holding Co., Ltd. (SZSE:000025) makes use of debt. 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. 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. 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.

Check out our latest analysis for Shenzhen Tellus Holding

What Is Shenzhen Tellus Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen Tellus Holding had CN¥115.1m of debt in September 2024, down from CN¥211.1m, one year before. But on the other hand it also has CN¥497.5m in cash, leading to a CN¥382.4m net cash position.

How Strong Is Shenzhen Tellus Holding's Balance Sheet?

According to the last reported balance sheet, Shenzhen Tellus Holding had liabilities of CN¥568.7m due within 12 months, and liabilities of CN¥112.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥497.5m as well as receivables valued at CN¥281.3m due within 12 months. So it actually has CN¥97.2m more liquid assets than total liabilities.

Having regard to Shenzhen Tellus Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥6.95b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Shenzhen Tellus Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Shenzhen Tellus Holding has increased its EBIT by 3.7% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shenzhen Tellus Holding's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Shenzhen Tellus Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Shenzhen Tellus Holding burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Tellus Holding has CN¥382.4m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 3.7% over the last year. So we don't have any problem with Shenzhen Tellus Holding's use of debt. 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. Case in point: We've spotted 1 warning sign for Shenzhen Tellus Holding you should be aware of.

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.