Is Zhongfu Straits (Pingtan) Development (SZSE:000592) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Zhongfu Straits (Pingtan) Development Company Limited (SZSE:000592) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zhongfu Straits (Pingtan) Development

How Much Debt Does Zhongfu Straits (Pingtan) Development Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zhongfu Straits (Pingtan) Development had CN¥23.9m of debt, an increase on none, over one year. But it also has CN¥713.8m in cash to offset that, meaning it has CN¥689.9m net cash.

A Look At Zhongfu Straits (Pingtan) Development's Liabilities

We can see from the most recent balance sheet that Zhongfu Straits (Pingtan) Development had liabilities of CN¥1.60b falling due within a year, and liabilities of CN¥36.0m due beyond that. Offsetting these obligations, it had cash of CN¥713.8m as well as receivables valued at CN¥358.0m due within 12 months. So its liabilities total CN¥564.4m more than the combination of its cash and short-term receivables.

Since publicly traded Zhongfu Straits (Pingtan) Development shares are worth a total of CN¥5.97b, 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, Zhongfu Straits (Pingtan) Development also has more cash than debt, so we're pretty confident 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 Zhongfu Straits (Pingtan) Development will need earnings to service that debt. 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.

In the last year Zhongfu Straits (Pingtan) Development wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to CN¥1.5b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Zhongfu Straits (Pingtan) Development?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Zhongfu Straits (Pingtan) Development lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥134m and booked a CN¥306m accounting loss. But the saving grace is the CN¥689.9m on the balance sheet. That means it could keep spending at its current rate for more than two years. Zhongfu Straits (Pingtan) Development's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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 example, we've discovered 2 warning signs for Zhongfu Straits (Pingtan) Development (1 is concerning!) 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.