Shen You Holdings (HKG:8377) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Shen You Holdings Limited (HKG:8377) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shen You Holdings

What Is Shen You Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Shen You Holdings had HK$32.7m of debt, an increase on HK$6.88m, over one year. However, it does have HK$42.1m in cash offsetting this, leading to net cash of HK$9.38m.

How Healthy Is Shen You Holdings' Balance Sheet?

According to the last reported balance sheet, Shen You Holdings had liabilities of HK$74.9m due within 12 months, and liabilities of HK$599.0k due beyond 12 months. Offsetting these obligations, it had cash of HK$42.1m as well as receivables valued at HK$23.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$9.52m.

Of course, Shen You Holdings has a market capitalization of HK$220.9m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Shen You Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Shen You 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.

In the last year Shen You Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to HK$77m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Shen You Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Shen You Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$27m and booked a HK$14m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of HK$9.38m. That kitty means the company can keep spending for growth for at least two years, at current rates. Shen You Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Shen You Holdings (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.