We Think Zhongrun Resources Investment (SZSE:000506) Has A Fair Chunk Of 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. As with many other companies Zhongrun Resources Investment Corporation (SZSE:000506) makes use of debt. But is this debt a concern to shareholders?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Zhongrun Resources Investment

What Is Zhongrun Resources Investment's Debt?

As you can see below, Zhongrun Resources Investment had CN¥85.0m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥3.85m in cash offsetting this, leading to net debt of about CN¥81.2m.

How Strong Is Zhongrun Resources Investment's Balance Sheet?

The latest balance sheet data shows that Zhongrun Resources Investment had liabilities of CN¥1.07b due within a year, and liabilities of CN¥86.8m falling due after that. On the other hand, it had cash of CN¥3.85m and CN¥112.3m worth of receivables due within a year. So its liabilities total CN¥1.04b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Zhongrun Resources Investment has a market capitalization of CN¥4.10b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Zhongrun Resources Investment's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Zhongrun Resources Investment made a loss at the EBIT level, and saw its revenue drop to CN¥221m, which is a fall of 23%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Zhongrun Resources Investment's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥83m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥19m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. For instance, we've identified 1 warning sign for Zhongrun Resources Investment that you should be aware of.

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.