Is Shenguan Holdings (Group) (HKG:829) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Shenguan Holdings (Group) Limited (HKG:829) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shenguan Holdings (Group)

How Much Debt Does Shenguan Holdings (Group) Carry?

As you can see below, at the end of December 2022, Shenguan Holdings (Group) had CN¥535.2m of debt, up from CN¥418.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥954.0m in cash, so it actually has CN¥418.7m net cash.

How Healthy Is Shenguan Holdings (Group)'s Balance Sheet?

According to the last reported balance sheet, Shenguan Holdings (Group) had liabilities of CN¥805.7m due within 12 months, and liabilities of CN¥29.2m due beyond 12 months. Offsetting this, it had CN¥954.0m in cash and CN¥208.4m in receivables that were due within 12 months. So it actually has CN¥327.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Shenguan Holdings (Group)'s balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Shenguan Holdings (Group) has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shenguan Holdings (Group)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Shenguan Holdings (Group) made a loss at the EBIT level, and saw its revenue drop to CN¥1.0b, which is a fall of 12%. That's not what we would hope to see.

So How Risky Is Shenguan Holdings (Group)?

Although Shenguan Holdings (Group) had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥24m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Shenguan Holdings (Group) (1 shouldn't be ignored!) that you should be aware of before investing here.

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.