Does China Shenhua Energy (HKG:1088) Have A Healthy Balance Sheet?

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.' 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. As with many other companies China Shenhua Energy Company Limited (HKG:1088) makes use of debt. But should shareholders be worried about its use of debt?

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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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is China Shenhua Energy's Debt?

The chart below, which you can click on for greater detail, shows that China Shenhua Energy had CN¥35.4b in debt in June 2025; about the same as the year before. But on the other hand it also has CN¥152.2b in cash, leading to a CN¥116.7b net cash position.

How Healthy Is China Shenhua Energy's Balance Sheet?

We can see from the most recent balance sheet that China Shenhua Energy had liabilities of CN¥150.5b falling due within a year, and liabilities of CN¥61.9b due beyond that. Offsetting this, it had CN¥152.2b in cash and CN¥22.4b in receivables that were due within 12 months. So it has liabilities totalling CN¥37.9b more than its cash and near-term receivables, combined.

Of course, China Shenhua Energy has a titanic market capitalization of CN¥745.9b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, China Shenhua Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for China Shenhua Energy

On the other hand, China Shenhua Energy's EBIT dived 11%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine China Shenhua Energy's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While China Shenhua Energy has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, China Shenhua Energy produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about China Shenhua Energy's liabilities, but we can be reassured by the fact it has has net cash of CN¥116.7b. So we don't have any problem with China Shenhua Energy's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with China Shenhua Energy (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.