Is Shenghua Lande Scitech (HKG:8106) Using Debt Sensibly?

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 Shenghua Lande Scitech Limited (HKG:8106) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shenghua Lande Scitech

How Much Debt Does Shenghua Lande Scitech Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Shenghua Lande Scitech had debt of CN¥28.0m, up from none in one year. However, its balance sheet shows it holds CN¥50.4m in cash, so it actually has CN¥22.4m net cash.

How Strong Is Shenghua Lande Scitech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shenghua Lande Scitech had liabilities of CN¥70.4m due within 12 months and liabilities of CN¥4.93m due beyond that. On the other hand, it had cash of CN¥50.4m and CN¥58.5m worth of receivables due within a year. So it can boast CN¥33.6m more liquid assets than total liabilities.

This surplus liquidity suggests that Shenghua Lande Scitech's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Shenghua Lande Scitech 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 Shenghua Lande Scitech's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Shenghua Lande Scitech reported revenue of CN¥233m, which is a gain of 15%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Shenghua Lande Scitech?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Shenghua Lande Scitech had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥7.8m of cash and made a loss of CN¥4.9m. With only CN¥22.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Shenghua Lande Scitech that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.