Is China Shun Ke Long Holdings (HKG:974) Weighed On By Its Debt Load?

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.' 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 China Shun Ke Long Holdings Limited (HKG:974) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does China Shun Ke Long Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 China Shun Ke Long Holdings had CN¥62.0m of debt, an increase on CN¥28.0m, over one year. On the flip side, it has CN¥21.2m in cash leading to net debt of about CN¥40.8m.

How Healthy Is China Shun Ke Long Holdings' Balance Sheet?

We can see from the most recent balance sheet that China Shun Ke Long Holdings had liabilities of CN¥190.8m falling due within a year, and liabilities of CN¥31.5m due beyond that. Offsetting these obligations, it had cash of CN¥21.2m as well as receivables valued at CN¥35.3m due within 12 months. So its liabilities total CN¥165.9m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CN¥149.2m, we think shareholders really should watch China Shun Ke Long Holdings's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Check out our latest analysis for China Shun Ke Long Holdings

Over 12 months, China Shun Ke Long Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥593m, which is a fall of 11%. That's not what we would hope to see.

Caveat Emptor

Not only did China Shun Ke Long Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥40m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CN¥68m. In the meantime, we consider the stock to be risky. 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 2 warning signs for China Shun Ke Long Holdings (1 is a bit concerning!) 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. 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.