Does China Shenshan Orchard Holdings (SGX:BKV) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies China Shenshan Orchard Holdings Co. Ltd. (SGX:BKV) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for China Shenshan Orchard Holdings

How Much Debt Does China Shenshan Orchard Holdings Carry?

The image below, which you can click on for greater detail, shows that China Shenshan Orchard Holdings had debt of CN¥18.0m at the end of December 2021, a reduction from CN¥115.0m over a year. However, it does have CN¥98.3m in cash offsetting this, leading to net cash of CN¥80.3m.

How Healthy Is China Shenshan Orchard Holdings' Balance Sheet?

According to the last reported balance sheet, China Shenshan Orchard Holdings had liabilities of CN¥39.2m due within 12 months, and liabilities of CN¥266.8m due beyond 12 months. On the other hand, it had cash of CN¥98.3m and CN¥56.1m worth of receivables due within a year. So it has liabilities totalling CN¥151.7m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CN¥127.0m, we think shareholders really should watch China Shenshan Orchard Holdings's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that China Shenshan Orchard Holdings has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Shenshan Orchard Holdings will need earnings to service that debt. 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.

In the last year China Shenshan Orchard Holdings had a loss before interest and tax, and actually shrunk its revenue by 32%, to CN¥74m. That makes us nervous, to say the least.

So How Risky Is China Shenshan Orchard Holdings?

While China Shenshan Orchard Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥38m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. 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 Shenshan Orchard Holdings , and understanding them should be part of your investment process.

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.