Does Hengxin Shambala CultureLtd (SZSE:300081) Have A Healthy Balance Sheet?

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.' 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. Importantly, Hengxin Shambala Culture Co.,Ltd. (SZSE:300081) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hengxin Shambala CultureLtd

How Much Debt Does Hengxin Shambala CultureLtd Carry?

As you can see below, Hengxin Shambala CultureLtd had CN¥107.4m of debt at September 2023, down from CN¥168.9m a year prior. However, its balance sheet shows it holds CN¥209.3m in cash, so it actually has CN¥101.9m net cash.

How Strong Is Hengxin Shambala CultureLtd's Balance Sheet?

According to the last reported balance sheet, Hengxin Shambala CultureLtd had liabilities of CN¥292.4m due within 12 months, and liabilities of CN¥34.4m due beyond 12 months. Offsetting this, it had CN¥209.3m in cash and CN¥129.6m in receivables that were due within 12 months. So it can boast CN¥12.1m more liquid assets than total liabilities.

This state of affairs indicates that Hengxin Shambala CultureLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥4.89b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Hengxin Shambala CultureLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Hengxin Shambala CultureLtd'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.

In the last year Hengxin Shambala CultureLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 97%, to CN¥594m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Hengxin Shambala CultureLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Hengxin Shambala CultureLtd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥161m and booked a CN¥396m accounting loss. But at least it has CN¥101.9m on the balance sheet to spend on growth, near-term. Hengxin Shambala CultureLtd's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Hengxin Shambala CultureLtd is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.