Does China Shenhua Energy (HKG:1088) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, China Shenhua Energy Company Limited (HKG:1088) does carry debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is China Shenhua Energy's Debt?

As you can see below, China Shenhua Energy had CN¥34.1b of debt at September 2025, down from CN¥35.9b a year prior. However, its balance sheet shows it holds CN¥107.1b in cash, so it actually has CN¥73.0b net cash.

How Strong Is China Shenhua Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Shenhua Energy had liabilities of CN¥97.5b due within 12 months and liabilities of CN¥59.1b due beyond that. Offsetting these obligations, it had cash of CN¥107.1b as well as receivables valued at CN¥17.9b due within 12 months. So its liabilities total CN¥31.6b more than the combination of its cash and short-term receivables.

Of course, China Shenhua Energy has a titanic market capitalization of CN¥803.9b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, China Shenhua Energy also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for China Shenhua Energy

On the other hand, China Shenhua Energy's EBIT dived 16%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if China Shenhua Energy can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While China Shenhua Energy has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, China Shenhua Energy recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that China Shenhua Energy has CN¥73.0b in net cash. So we are not troubled with China Shenhua Energy's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example China Shenhua Energy has 2 warning signs (and 1 which is significant) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.