Stock Analysis

Health Check: How Prudently Does China Shenshan Orchard Holdings (SGX:BKV) Use Debt?

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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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that China Shenshan Orchard Holdings Co. Ltd. (SGX:BKV) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for China Shenshan Orchard Holdings

What Is China Shenshan Orchard Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that China Shenshan Orchard Holdings had CN¥18.0m of debt in December 2021, down from CN¥115.0m, one year before. However, it does have CN¥98.3m in cash offsetting this, leading to net cash of CN¥80.3m.

SGX:BKV Debt to Equity History March 6th 2022

How Strong Is China Shenshan Orchard Holdings' Balance Sheet?

We can see from the most recent balance sheet that China Shenshan Orchard Holdings had liabilities of CN¥39.2m falling due within a year, and liabilities of CN¥266.8m due beyond that. Offsetting this, it had CN¥98.3m in cash and CN¥55.9m in receivables that were due within 12 months. So it has liabilities totalling CN¥151.9m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's CN¥124.1m market capitalization, you might well be inclined to review the balance sheet intently. 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 it is China Shenshan Orchard Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, China Shenshan Orchard Holdings reported revenue of CN¥218m, which is a gain of 100%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is China Shenshan Orchard Holdings?

Although China Shenshan Orchard Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥15m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive was the revenue growth of 100% over the last year. But we genuinely do think the balance sheet is a risky. 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. Be aware that China Shenshan Orchard Holdings is showing 2 warning signs in our investment analysis , you should know about...

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.

Valuation is complex, but we're helping make it simple.

Find out whether China Shenshan Orchard Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.