Is Shentong Robot Education Group (HKG:8206) Using Too Much 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Shentong Robot Education Group Company Limited (HKG:8206) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shentong Robot Education Group

What Is Shentong Robot Education Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Shentong Robot Education Group had HK$124.1m of debt, an increase on HK$112.6m, over one year. However, it does have HK$268.3m in cash offsetting this, leading to net cash of HK$144.2m.

How Healthy Is Shentong Robot Education Group's Balance Sheet?

We can see from the most recent balance sheet that Shentong Robot Education Group had liabilities of HK$303.7m falling due within a year, and liabilities of HK$24.9m due beyond that. On the other hand, it had cash of HK$268.3m and HK$2.22m worth of receivables due within a year. So its liabilities total HK$58.1m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Shentong Robot Education Group is worth HK$113.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Shentong Robot Education Group also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Shentong Robot Education Group 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.

In the last year Shentong Robot Education Group had a loss before interest and tax, and actually shrunk its revenue by 75%, to HK$14m. To be frank that doesn't bode well.

So How Risky Is Shentong Robot Education Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Shentong Robot Education Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$25m of cash and made a loss of HK$17m. With only HK$144.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Shentong Robot Education Group has 3 warning signs (and 1 which is potentially serious) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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