Shenzhou International Group Holdings (HKG:2313) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 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 and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shenzhou International Group Holdings

How Much Debt Does Shenzhou International Group Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2021 Shenzhou International Group Holdings had debt of CN¥7.85b, up from CN¥6.76b in one year. But on the other hand it also has CN¥13.7b in cash, leading to a CN¥5.86b net cash position.

A Look At Shenzhou International Group Holdings' Liabilities

The latest balance sheet data shows that Shenzhou International Group Holdings had liabilities of CN¥9.88b due within a year, and liabilities of CN¥779.0m falling due after that. Offsetting this, it had CN¥13.7b in cash and CN¥3.97b in receivables that were due within 12 months. So it actually has CN¥7.02b 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!

The good news is that Shenzhou International Group Holdings has increased its EBIT by 8.5% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Shenzhou International Group Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Shenzhou International Group Holdings recorded free cash flow worth 64% 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 it is always sensible to investigate a company's debt, in this case Shenzhou International Group Holdings has CN¥5.86b in net cash and a decent-looking balance sheet. So we don't think Shenzhou International Group Holdings's use of debt is risky. We'd be very excited to see if Shenzhou International Group Holdings insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.
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