Does Zicom Group (ASX:ZGL) 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. We note that Zicom Group Limited (ASX:ZGL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Zicom Group

What Is Zicom Group's Net Debt?

As you can see below, Zicom Group had S$32.2m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had S$16.6m in cash, and so its net debt is S$15.6m.

How Strong Is Zicom Group's Balance Sheet?

According to the last reported balance sheet, Zicom Group had liabilities of S$78.2m due within 12 months, and liabilities of S$12.5m due beyond 12 months. Offsetting these obligations, it had cash of S$16.6m as well as receivables valued at S$34.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$39.7m.

This deficit casts a shadow over the S$8.29m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Zicom Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zicom Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Zicom Group had a loss before interest and tax, and actually shrunk its revenue by 2.9%, to S$101m. We would much prefer see growth.

Caveat Emptor

Importantly, Zicom Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable S$4.0m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost S$6.7m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - Zicom Group has 3 warning signs we think you should be aware of.

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.

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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.