Is China SCE Group Holdings (HKG:1966) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that China SCE Group Holdings Limited (HKG:1966) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for China SCE Group Holdings

How Much Debt Does China SCE Group Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that China SCE Group Holdings had CN¥37.9b of debt in June 2023, down from CN¥52.4b, one year before. However, it also had CN¥9.16b in cash, and so its net debt is CN¥28.8b.

How Healthy Is China SCE Group Holdings' Balance Sheet?

According to the last reported balance sheet, China SCE Group Holdings had liabilities of CN¥129.2b due within 12 months, and liabilities of CN¥29.4b due beyond 12 months. Offsetting these obligations, it had cash of CN¥9.16b as well as receivables valued at CN¥3.47b due within 12 months. So its liabilities total CN¥145.9b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥1.00b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, China SCE Group Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if China SCE Group Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year China SCE Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 36%, to CN¥21b. That makes us nervous, to say the least.

Caveat Emptor

Not only did China SCE Group Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥784m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥2.4b in the last year. So we think buying this stock is risky. 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. We've identified 2 warning signs with China SCE Group Holdings (at least 1 which is concerning) , 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.