Is Zhewen Pictures Groupltd (SHSE:601599) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Zhewen Pictures Group co.,ltd (SHSE:601599) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Zhewen Pictures Groupltd

What Is Zhewen Pictures Groupltd's Debt?

As you can see below, at the end of September 2023, Zhewen Pictures Groupltd had CN¥537.3m of debt, up from CN¥366.3m a year ago. Click the image for more detail. However, it does have CN¥1.23b in cash offsetting this, leading to net cash of CN¥697.4m.

How Healthy Is Zhewen Pictures Groupltd's Balance Sheet?

We can see from the most recent balance sheet that Zhewen Pictures Groupltd had liabilities of CN¥1.89b falling due within a year, and liabilities of CN¥168.4m due beyond that. On the other hand, it had cash of CN¥1.23b and CN¥866.6m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Zhewen Pictures Groupltd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥4.19b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Zhewen Pictures Groupltd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zhewen Pictures Groupltd 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, Zhewen Pictures Groupltd reported revenue of CN¥2.8b, which is a gain of 3.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Zhewen Pictures Groupltd?

While Zhewen Pictures Groupltd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥113m. 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 mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Zhewen Pictures Groupltd you should be aware of, and 1 of them can't be ignored.

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.