These 4 Measures Indicate That Shenghui Cleanness Group Holdings (HKG:2521) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Shenghui Cleanness Group Holdings Limited (HKG:2521) does use debt in its business. But the real question is whether this debt is making the company risky.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Shenghui Cleanness Group Holdings Carry?

As you can see below, at the end of June 2025, Shenghui Cleanness Group Holdings had CN¥30.1m of debt, up from CN¥11.8m a year ago. Click the image for more detail. However, it does have CN¥104.9m in cash offsetting this, leading to net cash of CN¥74.8m.

A Look At Shenghui Cleanness Group Holdings' Liabilities

The latest balance sheet data shows that Shenghui Cleanness Group Holdings had liabilities of CN¥176.2m due within a year, and liabilities of CN¥23.4m falling due after that. Offsetting these obligations, it had cash of CN¥104.9m as well as receivables valued at CN¥349.4m due within 12 months. So it actually has CN¥254.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that Shenghui Cleanness Group Holdings' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Shenghui Cleanness Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Shenghui Cleanness Group Holdings

On the other hand, Shenghui Cleanness Group Holdings's EBIT dived 16%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shenghui Cleanness Group 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shenghui Cleanness Group Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Shenghui Cleanness Group Holdings burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenghui Cleanness Group Holdings has CN¥74.8m in net cash and a decent-looking balance sheet. So we are not troubled with Shenghui Cleanness Group Holdings's debt use. When analysing debt levels, the balance sheet is the obvious place to start. 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 5 warning signs for Shenghui Cleanness Group Holdings (of which 1 makes us a bit uncomfortable!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.