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. Importantly, Zotye Automobile Co., Ltd (SZSE:000980) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

View 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¥2.61b at the end of June 2024, a reduction from CN¥2.95b over a year. However, it also had CN¥640.7m in cash, and so its net debt is CN¥1.97b.

A Look At Zotye Automobile's Liabilities

Zooming in on the latest balance sheet data, we can see that Zotye Automobile had liabilities of CN¥3.11b due within 12 months and liabilities of CN¥1.35b due beyond that. On the other hand, it had cash of CN¥640.7m and CN¥1.49b worth of receivables due within a year. So it has liabilities totalling CN¥2.33b more than its cash and near-term receivables, combined.

Zotye Automobile has a market capitalization of CN¥7.87b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zotye Automobile will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Zotye Automobile had a loss before interest and tax, and actually shrunk its revenue by 29%, to CN¥612m. To be frank that doesn't bode well.

Caveat Emptor

While Zotye Automobile's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥585m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥52m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Zotye Automobile that you should be aware of.

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.