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 Shenguan Holdings (Group) Limited (HKG:829) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shenguan Holdings (Group)

How Much Debt Does Shenguan Holdings (Group) Carry?

You can click the graphic below for the historical numbers, but it shows that Shenguan Holdings (Group) had CN¥82.7m of debt in December 2018, down from CN¥190.7m, one year before. But it also has CN¥504.9m in cash to offset that, meaning it has CN¥422.2m net cash.

A Look At Shenguan Holdings (Group)'s Liabilities

We can see from the most recent balance sheet that Shenguan Holdings (Group) had liabilities of CN¥236.9m falling due within a year, and liabilities of CN¥66.5m due beyond that. Offsetting these obligations, it had cash of CN¥504.9m as well as receivables valued at CN¥236.6m due within 12 months. So it actually has CN¥438.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Shenguan Holdings (Group)'s balance sheet is just as strong as racists are weak. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Shenguan Holdings (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Shenguan Holdings (Group) grew its EBIT by 138% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shenguan Holdings (Group)'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.