Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Star Shine Holdings Group Limited (HKG:1440) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
View our latest analysis for Star Shine Holdings Group
What Is Star Shine Holdings Group's Debt?
The image below, which you can click on for greater detail, shows that at June 2024 Star Shine Holdings Group had debt of CN¥37.2m, up from CN¥3.70m in one year. But it also has CN¥212.6m in cash to offset that, meaning it has CN¥175.3m net cash.
How Strong Is Star Shine Holdings Group's Balance Sheet?
The latest balance sheet data shows that Star Shine Holdings Group had liabilities of CN¥124.0m due within a year, and liabilities of CN¥3.86m falling due after that. On the other hand, it had cash of CN¥212.6m and CN¥87.1m worth of receivables due within a year. So it can boast CN¥171.8m more liquid assets than total liabilities.
This surplus suggests that Star Shine Holdings Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Star Shine Holdings Group has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Star Shine Holdings Group'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, Star Shine Holdings Group reported revenue of CN¥544m, which is a gain of 439%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is Star Shine Holdings Group?
Although Star Shine Holdings Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥45m. 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. Keeping in mind its 439% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. The balance sheet is clearly the area to focus on when you are analysing debt. 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 Star Shine Holdings Group (of which 1 is significant!) you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.