Shoucheng Holdings (HKG:697) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Shoucheng Holdings Limited (HKG:697) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Shoucheng Holdings

What Is Shoucheng Holdings's Debt?

As you can see below, Shoucheng Holdings had HK$1.11b of debt at June 2024, down from HK$1.24b a year prior. However, its balance sheet shows it holds HK$4.19b in cash, so it actually has HK$3.09b net cash.

How Strong Is Shoucheng Holdings' Balance Sheet?

The latest balance sheet data shows that Shoucheng Holdings had liabilities of HK$1.24b due within a year, and liabilities of HK$2.96b falling due after that. Offsetting these obligations, it had cash of HK$4.19b as well as receivables valued at HK$254.9m due within 12 months. So it actually has HK$251.7m more liquid assets than total liabilities.

This surplus suggests that Shoucheng Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shoucheng Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Shoucheng Holdings grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shoucheng Holdings'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shoucheng Holdings 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, Shoucheng Holdings burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shoucheng Holdings has HK$3.09b in net cash and a decent-looking balance sheet. And we liked the look of last year's 24% year-on-year EBIT growth. So we are not troubled with Shoucheng Holdings's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Shoucheng Holdings (1 is concerning) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.