Is Zbom Home CollectionLtd (SHSE:603801) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Zbom Home Collection Co.,Ltd (SHSE:603801) does carry debt. But the real question is whether this debt is making the company risky.

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Zbom Home CollectionLtd

What Is Zbom Home CollectionLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zbom Home CollectionLtd had CN¥499.2m of debt, an increase on CN¥253.9m, over one year. However, its balance sheet shows it holds CN¥1.24b in cash, so it actually has CN¥736.5m net cash.

How Strong Is Zbom Home CollectionLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zbom Home CollectionLtd had liabilities of CN¥2.71b due within 12 months and liabilities of CN¥314.1m due beyond that. Offsetting this, it had CN¥1.24b in cash and CN¥1.48b in receivables that were due within 12 months. So its liabilities total CN¥312.8m more than the combination of its cash and short-term receivables.

Since publicly traded Zbom Home CollectionLtd shares are worth a total of CN¥5.79b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Zbom Home CollectionLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Zbom Home CollectionLtd's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. 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. Looking at the most recent three years, Zbom Home CollectionLtd recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Zbom Home CollectionLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥736.5m. So we are not troubled with Zbom Home CollectionLtd's debt use. 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. For example Zbom Home CollectionLtd has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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.