Shinelong Automotive Lightweight Application Limited, a company listed on the Hong Kong Stock Exchange (SEHK:1930), may have garnered attention from investors due to its debt. According to renowned investor Howard Marks, the risk of permanent loss is of concern to practical investors, making it essential to scrutinize a company’s balance sheet, especially when debt is involved.
When does debt become a problem?
Debt becomes problematic when a company struggles to repay it, putting it at risk of losing control to lenders or having to dilute the equity of shareholders. While debt can be beneficial for businesses, particularly those that require heavy capital, it is essential to assess a company’s cash and debt collectively before forming any conclusions.
How much debt does Shinelong Automotive Lightweight Application have?
As of June 2023, Shinelong Automotive Lightweight Application had CN¥13.9m of debt, a significant increase from the previous year. However, it also boasts a healthy CN¥51.4m in cash, resulting in a net cash of CN¥37.5m.
Assessing the balance sheet
A closer examination of Shinelong Automotive Lightweight Application’s balance sheet reveals that it has CN¥245.2m in liabilities due within 12 months and CN¥16.5m due beyond 12 months. Offset by CN¥51.4m in cash and CN¥100.7m in receivables due within 12 months, the company faces a shortfall of CN¥109.6m. Nevertheless, with a net worth of CN¥198.2m, Shinelong Automotive Lightweight Application could potentially raise enough capital to strengthen its balance sheet when needed.
Additional factors to consider
While the balance sheet portrays an optimistic picture with more cash than debt, it is essential to acknowledge the company’s EBIT growth of 72% and its ability to convert EBIT to free cash flow. Shinelong Automotive Lightweight Application experienced substantial negative free cash flow over the last three years, indicating that its use of debt may carry certain risks.
Final thoughts
Despite the concerning total liabilities, the presence of net cash offers reassurance. Additionally, the significant EBIT growth is a positive indication. However, potential investors should remain cautious and consider all potential risks associated with Shinelong Automotive Lightweight Application, especially concerning its warning signs.
For those inclined towards fast-growing companies with robust balance sheets, an alternative list of net cash growth stocks is worth exploring.
In conclusion, it appears that Shinelong Automotive Lightweight Application’s use of debt does not pose an immediate concern. A comprehensive analysis of the company’s financial health, risks, and shareholder information is highly recommended for a well-informed investment decision.
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Please note that this article is intended to provide general commentary based on historical data and analyst forecasts. It does not constitute financial advice and does not consider individual financial situations. Our analysis aims to offer a long-term perspective based on fundamental data, although it may not factor in the latest company announcements or qualitative material. Simply Wall St, the publisher of this article, holds no position in any mentioned stocks.
About SEHK:1930 – Shinelong Automotive Lightweight Application
Shinelong Automotive Lightweight Application Limited is an investment holding company that specializes in developing and supplying custom molds in the People’s Republic of China and globally.
In summary, Shinelong Automotive Lightweight Application appears to have an excellent balance sheet but may be slightly overvalued.
All in all, deeper analysis is required to assess whether Shinelong Automotive Lightweight Application is potentially over or undervalued, considering fair value estimates, risks, dividends, insider transactions, and financial health.
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