Is Zbom Home CollectionLtd (SHSE:603801) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Zbom Home Collection Co.,Ltd (SHSE:603801) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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.

View our latest analysis for Zbom Home CollectionLtd

How Much Debt Does Zbom Home CollectionLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Zbom Home CollectionLtd had CN¥407.0m of debt in March 2024, down from CN¥556.9m, one year before. But it also has CN¥768.1m in cash to offset that, meaning it has CN¥361.1m net cash.

A Look At Zbom Home CollectionLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Zbom Home CollectionLtd had liabilities of CN¥2.07b due within 12 months and liabilities of CN¥281.5m due beyond that. Offsetting these obligations, it had cash of CN¥768.1m as well as receivables valued at CN¥1.40b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥181.5m.

Of course, Zbom Home CollectionLtd has a market capitalization of CN¥6.46b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Zbom Home CollectionLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Zbom Home CollectionLtd saw its EBIT decline by 8.2% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Zbom Home CollectionLtd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Zbom Home CollectionLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Zbom Home CollectionLtd's free cash flow amounted to 28% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Zbom Home CollectionLtd has CN¥361.1m in net cash. So we are not troubled with Zbom Home CollectionLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Zbom Home CollectionLtd (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.