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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'. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Shentong Robot Education Group Company Limited (HKG:8206) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Shentong Robot Education Group
What Is Shentong Robot Education Group's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 Shentong Robot Education Group had HK$110.3m of debt, an increase on HK$107, over one year. But it also has HK$236.1m in cash to offset that, meaning it has HK$125.8m net cash.
How Strong Is Shentong Robot Education Group's Balance Sheet?
The latest balance sheet data shows that Shentong Robot Education Group had liabilities of HK$308.5m due within a year, and liabilities of HK$99.5m falling due after that. Offsetting this, it had HK$236.1m in cash and HK$31.6m in receivables that were due within 12 months. So it has liabilities totalling HK$140.3m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Shentong Robot Education Group is worth HK$559.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Shentong Robot Education Group boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that Shentong Robot Education Group has increased its EBIT by 5.4% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shentong Robot Education Group 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.