Shenzhen Tellus Holding (SZSE:000025) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 as of September 2023 Shenzhen Tellus Holding had CN¥211.1m of debt, an increase on CN¥139.9m, over one year. But it also has CN¥366.7m in cash to offset that, meaning it has CN¥155.6m net cash.

How Healthy Is Shenzhen Tellus Holding's Balance Sheet?

According to the last reported balance sheet, Shenzhen Tellus Holding had liabilities of CN¥571.9m due within 12 months, and liabilities of CN¥152.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥366.7m as well as receivables valued at CN¥241.6m due within 12 months. So its liabilities total CN¥115.7m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Shenzhen Tellus Holding's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥6.08b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Shenzhen Tellus Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Shenzhen Tellus Holding has boosted its EBIT by 84%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shenzhen Tellus Holding 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Shenzhen Tellus Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Shenzhen Tellus Holding saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Shenzhen Tellus Holding has CN¥155.6m in net cash. And we liked the look of last year's 84% year-on-year EBIT growth. So we are not troubled with Shenzhen Tellus Holding's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Shenzhen Tellus Holding (1 makes us a bit uncomfortable) 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.