These 4 Measures Indicate That Shenghui Cleanness Group Holdings (HKG:2521) Is Using Debt Reasonably Well

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.' 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 can see that Shenghui Cleanness Group Holdings Limited (HKG:2521) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shenghui Cleanness Group Holdings

What Is Shenghui Cleanness Group Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Shenghui Cleanness Group Holdings had debt of CN¥11.8m, up from none in one year. But on the other hand it also has CN¥102.5m in cash, leading to a CN¥90.8m net cash position.

How Strong Is Shenghui Cleanness Group Holdings' Balance Sheet?

According to the last reported balance sheet, Shenghui Cleanness Group Holdings had liabilities of CN¥137.5m due within 12 months, and liabilities of CN¥6.10m due beyond 12 months. On the other hand, it had cash of CN¥102.5m and CN¥285.8m worth of receivables due within a year. So it can boast CN¥244.7m more liquid assets than total liabilities.

This surplus liquidity suggests that Shenghui Cleanness Group Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Shenghui Cleanness Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Shenghui Cleanness Group Holdings's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shenghui Cleanness Group Holdings'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shenghui Cleanness Group Holdings 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. Looking at the most recent three years, Shenghui Cleanness Group Holdings recorded free cash flow of 29% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenghui Cleanness Group Holdings has CN¥90.8m in net cash and a decent-looking balance sheet. So we don't have any problem with Shenghui Cleanness Group Holdings's use of debt. 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. Case in point: We've spotted 3 warning signs for Shenghui Cleanness Group Holdings you should be aware of, and 1 of them makes us a bit uncomfortable.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.