Is Zhonglu.Co.Ltd (SHSE:600818) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Zhonglu.Co.,Ltd (SHSE:600818) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zhonglu.Co.Ltd

What Is Zhonglu.Co.Ltd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Zhonglu.Co.Ltd had CN¥48.6m of debt, an increase on CN¥44.2m, over one year. But it also has CN¥198.3m in cash to offset that, meaning it has CN¥149.6m net cash.

How Strong Is Zhonglu.Co.Ltd's Balance Sheet?

We can see from the most recent balance sheet that Zhonglu.Co.Ltd had liabilities of CN¥218.1m falling due within a year, and liabilities of CN¥109.5m due beyond that. On the other hand, it had cash of CN¥198.3m and CN¥89.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥39.6m.

This state of affairs indicates that Zhonglu.Co.Ltd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥3.85b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Zhonglu.Co.Ltd 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 you can't view debt in total isolation; since Zhonglu.Co.Ltd 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.

Over 12 months, Zhonglu.Co.Ltd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Zhonglu.Co.Ltd?

While Zhonglu.Co.Ltd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥17m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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, we've discovered 3 warning signs for Zhonglu.Co.Ltd (2 are potentially serious!) that you should be aware of before investing here.

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.