Hengxin Shambala CultureLtd (SZSE:300081) Is Carrying A Fair Bit Of Debt

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. We note that Hengxin Shambala Culture Co.,Ltd. (SZSE:300081) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Hengxin Shambala CultureLtd

How Much Debt Does Hengxin Shambala CultureLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hengxin Shambala CultureLtd had CN¥112.5m of debt, an increase on CN¥107.4m, over one year. However, it also had CN¥95.0m in cash, and so its net debt is CN¥17.5m.

A Look At Hengxin Shambala CultureLtd's Liabilities

The latest balance sheet data shows that Hengxin Shambala CultureLtd had liabilities of CN¥761.1m due within a year, and liabilities of CN¥28.5m falling due after that. Offsetting this, it had CN¥95.0m in cash and CN¥198.4m in receivables that were due within 12 months. So its liabilities total CN¥496.2m more than the combination of its cash and short-term receivables.

Since publicly traded Hengxin Shambala CultureLtd shares are worth a total of CN¥5.41b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Hengxin Shambala CultureLtd has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 had a loss before interest and tax, and actually shrunk its revenue by 40%, to CN¥355m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Hengxin Shambala CultureLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥235m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥97m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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 3 warning signs for Hengxin Shambala CultureLtd you should be aware of.

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.