Stock Analysis

Is China Shenshan Orchard Holdings (SGX:BKV) A Risky Investment?

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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 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?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Our analysis indicates that BKV is potentially undervalued!

How Much Debt Does China Shenshan Orchard Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that China Shenshan Orchard Holdings had CN¥15.8m of debt in June 2022, down from CN¥115.0m, one year before. But on the other hand it also has CN¥107.5m in cash, leading to a CN¥91.7m net cash position.

SGX:BKV Debt to Equity History October 18th 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¥28.1m falling due within a year, and liabilities of CN¥249.7m due beyond that. Offsetting these obligations, it had cash of CN¥107.5m as well as receivables valued at CN¥56.1m due within 12 months. So it has liabilities totalling CN¥114.2m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's CN¥101.0m 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since China Shenshan Orchard Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year China Shenshan Orchard Holdings had a loss before interest and tax, and actually shrunk its revenue by 31%, to CN¥74m. To be frank that doesn't bode well.

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¥24m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for China Shenshan Orchard Holdings (of which 1 is a bit concerning!) you should know about.

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.

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.