Shenzhen Tellus Holding (SZSE:000025) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Tellus Holding Co., Ltd. (SZSE:000025) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Tellus Holding

How Much Debt Does Shenzhen Tellus Holding Carry?

You can click the graphic below for the historical numbers, but it shows that Shenzhen Tellus Holding had CN¥160.1m of debt in June 2024, down from CN¥338.0m, one year before. However, its balance sheet shows it holds CN¥634.9m in cash, so it actually has CN¥474.8m net cash.

How Healthy Is Shenzhen Tellus Holding's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Tellus Holding had liabilities of CN¥578.6m falling due within a year, and liabilities of CN¥117.4m due beyond that. On the other hand, it had cash of CN¥634.9m and CN¥223.8m worth of receivables due within a year. So it can boast CN¥162.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Tellus Holding could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shenzhen Tellus Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Shenzhen Tellus Holding grew its EBIT at 14% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shenzhen Tellus Holding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Tellus Holding has net cash of CN¥474.8m, as well as more liquid assets than liabilities. And it also grew its EBIT by 14% over the last year. So we don't have any problem with Shenzhen Tellus Holding's use of debt. 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. For instance, we've identified 1 warning sign for Shenzhen Tellus Holding that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.