Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital.” So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We can see that Shentong Robot Education Group Company Limited (HKG: 8206) uses debt in his business. But the most important question is: what risk does this debt create?
When Is Debt a Problem?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for Shentong Robot Education Group
What is the net debt of Shentong Robot Education Group?
You can click on the graph below for historical figures, but it shows that as of September 2021, Shentong Robot Education Group had a debt of HK $ 124.1 million, an increase from HK $ 112.6 million. HK $, over one year. However, he has HK $ 268.3million in cash offsetting this, which leads to a net cash flow of HK $ 144.2million.
How healthy is Shentong Robot Education Group’s track record?
We can see from the most recent balance sheet that Shentong Robot Education Group had a liability of HK $ 303.7 million due within one year, and a liability of HK $ 24.9 million due to- of the. On the other hand, he had HK $ 268.3 million in cash and HK $ 2.22 million in receivables due within one year. Its liabilities therefore total HK $ 58.1 million more than the combination of its cash and short-term receivables.
This shortfall is not that big as Shentong Robot Education Group is worth HK $ 113.7 million, so it could probably raise enough capital to consolidate its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay debts. While it has some liabilities to note, Shentong Robot Education Group also has more cash than debt, so we’re pretty confident that it can handle its debt safely. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in isolation; since Shentong Robot Education Group will need income to pay off this debt. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.
In the past year, Shentong Robot Education Group suffered a loss before interest and taxes, and in fact reduced its revenue by 75%, to HK $ 14 million. To be frank, that doesn’t bode well.
So how risky is the Shentong Robot Education group?
We are convinced that loss-making companies are, in general, riskier than profitable companies. And in the past year, Shentong Robot Education Group recorded a loss of profit before interest and taxes (EBIT), frankly. Indeed, during this period, he spent HK $ 25million in cash and recorded a loss of HK $ 17million. With only HK $ 144.2 million on the balance sheet, it looks like it will soon have to raise capital again. Overall we would say the stock is a bit risky and we are generally very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, Shentong Robot Education Group has 3 warning signs (and 1 which is potentially serious) we think you should be aware of.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St does not have any position in the mentioned stocks.
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