Shenguan Holdings (Group) (HKG:829) Seems To Use Debt Rather Sparingly
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.' 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 Shenguan Holdings (Group) Limited (HKG:829) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Shenguan Holdings (Group)
What Is Shenguan Holdings (Group)'s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Shenguan Holdings (Group) had CN„148.4m of debt, an increase on CN„89.6m, over one year. However, its balance sheet shows it holds CN„717.3m in cash, so it actually has CN„568.9m net cash.
A Look At Shenguan Holdings (Group)'s Liabilities
According to the last reported balance sheet, Shenguan Holdings (Group) had liabilities of CN„403.2m due within 12 months, and liabilities of CN„38.2m due beyond 12 months. Offsetting these obligations, it had cash of CN„717.3m as well as receivables valued at CN„168.4m due within 12 months. So it can boast CN„444.2m more liquid assets than total liabilities.
This luscious liquidity implies that Shenguan Holdings (Group)'s balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Shenguan Holdings (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Shenguan Holdings (Group) has boosted its EBIT by 76%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shenguan Holdings (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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shenguan Holdings (Group) 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. Happily for any shareholders, Shenguan Holdings (Group) actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Shenguan Holdings (Group) has net cash of CN„568.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN„367m, being 526% of its EBIT. When it comes to Shenguan Holdings (Group)'s debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. To that end, you should learn about the 3 warning signs we've spotted with Shenguan Holdings (Group) (including 1 which is a bit unpleasant) .
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.
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This article by Simply Wall St is general in nature. 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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About SEHK:829
Shenguan Holdings (Group)
An investment holding company, engages in the manufacture and sale of edible collagen sausage casing products in Mainland China, Asia, and internationally.
Proven track record with adequate balance sheet.
