Zhongbai Holdings GroupLtd (SZSE:000759) Has Debt But No Earnings; Should You Worry?

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.' 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. We note that Zhongbai Holdings Group Co.,Ltd. (SZSE:000759) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Zhongbai Holdings GroupLtd

How Much Debt Does Zhongbai Holdings GroupLtd Carry?

As you can see below, Zhongbai Holdings GroupLtd had CN¥1.29b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥1.22b in cash, and so its net debt is CN¥69.8m.

How Strong Is Zhongbai Holdings GroupLtd's Balance Sheet?

According to the last reported balance sheet, Zhongbai Holdings GroupLtd had liabilities of CN¥6.74b due within 12 months, and liabilities of CN¥2.24b due beyond 12 months. Offsetting this, it had CN¥1.22b in cash and CN¥635.8m in receivables that were due within 12 months. So it has liabilities totalling CN¥7.13b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's CN¥5.62b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Zhongbai Holdings GroupLtd has a very little net debt but plenty of other liabilities weighing it down. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Zhongbai Holdings GroupLtd'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.

Over 12 months, Zhongbai Holdings GroupLtd made a loss at the EBIT level, and saw its revenue drop to CN¥11b, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

While Zhongbai Holdings GroupLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥394m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CN¥589m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Zhongbai Holdings GroupLtd (of which 1 is a bit concerning!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.