Health Check: How Prudently Does Star Shine Holdings Group (HKG:1440) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Star Shine Holdings Group Limited (HKG:1440) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

See our latest analysis for Star Shine Holdings Group

How Much Debt Does Star Shine Holdings Group Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Star Shine Holdings Group had debt of CN¥36.9m, up from none in one year. However, it does have CN¥269.2m in cash offsetting this, leading to net cash of CN¥232.4m.

How Healthy Is Star Shine Holdings Group's Balance Sheet?

The latest balance sheet data shows that Star Shine Holdings Group had liabilities of CN¥171.9m due within a year, and liabilities of CN¥4.43m falling due after that. Offsetting these obligations, it had cash of CN¥269.2m as well as receivables valued at CN¥85.8m due within 12 months. So it can boast CN¥178.7m more liquid assets than total liabilities.

This surplus suggests that Star Shine Holdings Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Star Shine Holdings Group boasts net cash, 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 Star Shine Holdings Group'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 Star Shine Holdings Group wasn't profitable at an EBIT level, but managed to grow its revenue by 137%, to CN¥317m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Star Shine Holdings Group?

Although Star Shine Holdings Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥45m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 137% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Star Shine Holdings Group has 2 warning signs (and 1 which is potentially serious) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.