Is China Shun Ke Long Holdings (HKG:974) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, China Shun Ke Long Holdings Limited (HKG:974) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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

See our latest analysis for China Shun Ke Long Holdings

How Much Debt Does China Shun Ke Long Holdings Carry?

The chart below, which you can click on for greater detail, shows that China Shun Ke Long Holdings had CN¥108.0m in debt in June 2020; about the same as the year before. However, its balance sheet shows it holds CN¥131.5m in cash, so it actually has CN¥23.5m net cash.

A Look At China Shun Ke Long Holdings's Liabilities

We can see from the most recent balance sheet that China Shun Ke Long Holdings had liabilities of CN¥276.3m falling due within a year, and liabilities of CN¥49.7m due beyond that. On the other hand, it had cash of CN¥131.5m and CN¥38.2m worth of receivables due within a year. So its liabilities total CN¥156.3m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥168.9m, so it does suggest shareholders should keep an eye on China Shun Ke Long Holdings's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, China Shun Ke Long Holdings 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 China Shun Ke Long Holdings 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, China Shun Ke Long Holdings saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is China Shun Ke Long Holdings?

Although China Shun Ke Long Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥7.5m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for China Shun Ke Long Holdings (2 are a bit unpleasant!) that you should be aware of before investing here.

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.

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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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