Zotye Automobile (SZSE:000980) Is Making Moderate Use Of Debt

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.' 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 can see that Zotye Automobile Co., Ltd (SZSE:000980) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Zotye Automobile

What Is Zotye Automobile's Net Debt?

The image below, which you can click on for greater detail, shows that Zotye Automobile had debt of CN¥2.38b at the end of September 2024, a reduction from CN¥2.99b over a year. However, it also had CN¥412.6m in cash, and so its net debt is CN¥1.97b.

How Strong Is Zotye Automobile's Balance Sheet?

We can see from the most recent balance sheet that Zotye Automobile had liabilities of CN¥2.96b falling due within a year, and liabilities of CN¥1.33b due beyond that. On the other hand, it had cash of CN¥412.6m and CN¥1.50b worth of receivables due within a year. So it has liabilities totalling CN¥2.38b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Zotye Automobile is worth CN¥11.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Zotye Automobile will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Zotye Automobile made a loss at the EBIT level, and saw its revenue drop to CN¥587m, which is a fall of 29%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Zotye Automobile's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥527m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥806m into a profit. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Zotye Automobile you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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