Shentong Robot Education Group (HKG:8206) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Shentong Robot Education Group Company Limited (HKG:8206) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Shentong Robot Education Group

What Is Shentong Robot Education Group's 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$128.0m of debt, an increase on HK$119.7m, over one year. But it also has HK$268.3m in cash to offset that, meaning it has HK$140.3m net cash.

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

According to the last reported balance sheet, Shentong Robot Education Group had liabilities of HK$303.7m due within 12 months, and liabilities of HK$24.9m due beyond 12 months. Offsetting these obligations, it had cash of HK$268.3m as well as receivables valued at HK$2.22m due within 12 months. So it has liabilities totalling HK$58.1m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Shentong Robot Education Group is worth HK$104.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Shentong Robot Education Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shentong Robot Education Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Shentong Robot Education Group made a loss at the EBIT level, and saw its revenue drop to HK$12m, which is a fall of 52%. To be frank that doesn't bode well.

So How Risky Is Shentong Robot Education Group?

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 Shentong Robot Education Group 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$25m and booked a HK$84m accounting loss. Given it only has net cash of HK$140.3m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Case in point: We've spotted 4 warning signs for Shentong Robot Education Group you should be aware of, and 1 of them can't be ignored.

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.