Is Shenzhou International Group Holdings (HKG:2313) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Shenzhou International Group Holdings Limited (HKG:2313) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shenzhou International Group Holdings

What Is Shenzhou International Group Holdings's Net Debt?

As you can see below, at the end of June 2020, Shenzhou International Group Holdings had CN¥6.76b of debt, up from CN¥2.50b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥13.1b in cash, so it actually has CN¥6.35b net cash.

A Look At Shenzhou International Group Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that Shenzhou International Group Holdings had liabilities of CN¥7.54b due within 12 months and liabilities of CN¥1.43b due beyond that. On the other hand, it had cash of CN¥13.1b and CN¥3.71b worth of receivables due within a year. So it can boast CN¥7.85b more liquid assets than total liabilities.

This surplus suggests that Shenzhou International Group Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shenzhou International Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Shenzhou International Group Holdings grew its EBIT by 10% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhou International Group Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shenzhou International 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. Over the most recent three years, Shenzhou International Group Holdings recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhou International Group Holdings has net cash of CN¥6.35b, as well as more liquid assets than liabilities. So is Shenzhou International Group Holdings's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Shenzhou International Group Holdings that you should be aware of before investing here.

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. 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.
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