Does Zentek (CVE:ZEN) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Zentek Ltd. (CVE:ZEN) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Zentek

How Much Debt Does Zentek Carry?

As you can see below, at the end of March 2022, Zentek had CA$1.95m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CA$26.7m in cash, leading to a CA$24.7m net cash position.

A Look At Zentek's Liabilities

We can see from the most recent balance sheet that Zentek had liabilities of CA$2.30m falling due within a year, and liabilities of CA$1.13m due beyond that. Offsetting these obligations, it had cash of CA$26.7m as well as receivables valued at CA$3.61m due within 12 months. So it actually has CA$26.8m more liquid assets than total liabilities.

This surplus suggests that Zentek has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zentek boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Zentek's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Given its lack of meaningful operating revenue, Zentek shareholders no doubt hope it can fund itself until it can sell some of its new medical technology.

So How Risky Is Zentek?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Zentek had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$12m and booked a CA$12m accounting loss. Given it only has net cash of CA$24.7m, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Zentek has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Zentek you should be aware of, and 2 of them are a bit concerning.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.