Is Zhewen Interactive Group (SHSE:600986) A Risky Investment?

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. We note that Zhewen Interactive Group Co., Ltd. (SHSE:600986) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Zhewen Interactive Group

How Much Debt Does Zhewen Interactive Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Zhewen Interactive Group had CN¥1.14b of debt, an increase on CN¥887.7m, over one year. However, it does have CN¥1.24b in cash offsetting this, leading to net cash of CN¥97.5m.

A Look At Zhewen Interactive Group's Liabilities

According to the last reported balance sheet, Zhewen Interactive Group had liabilities of CN¥2.98b due within 12 months, and liabilities of CN¥57.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.24b as well as receivables valued at CN¥4.36b due within 12 months. So it actually has CN¥2.56b more liquid assets than total liabilities.

This surplus strongly suggests that Zhewen Interactive Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Zhewen Interactive Group has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Zhewen Interactive Group saw its EBIT decline by 6.2% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Zhewen Interactive Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Zhewen Interactive Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Zhewen Interactive Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhewen Interactive Group has CN¥97.5m in net cash and a decent-looking balance sheet. So we don't have any problem with Zhewen Interactive Group's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Zhewen Interactive Group is showing 2 warning signs in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com