Star Shine Holdings Group (HKG:1440) Has Debt But No Earnings; Should You Worry?

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.' 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 Star Shine Holdings Group Limited (HKG:1440) 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?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Star Shine Holdings Group

What Is Star Shine Holdings Group's Debt?

As you can see below, at the end of June 2024, Star Shine Holdings Group had CN¥37.2m of debt, up from CN¥3.70m a year ago. Click the image for more detail. But it also has CN¥212.6m in cash to offset that, meaning it has CN¥175.3m net cash.

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

We can see from the most recent balance sheet that Star Shine Holdings Group had liabilities of CN¥124.0m falling due within a year, and liabilities of CN¥3.86m due beyond that. Offsetting this, it had CN¥212.6m in cash and CN¥87.1m in receivables that were due within 12 months. So it can boast CN¥171.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Star Shine Holdings Group could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 you can't view debt in total isolation; since Star Shine Holdings Group will need earnings to service that debt. 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.

Over 12 months, Star Shine Holdings Group reported revenue of CN¥544m, which is a gain of 439%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Star Shine Holdings Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Star Shine Holdings Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥11m and booked a CN¥5.5m accounting loss. But the saving grace is the CN¥175.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that Star Shine Holdings Group has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. We've identified 2 warning signs with Star Shine Holdings Group , and understanding them should be part of your investment process.

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.