Does Shenzhen Zqgame (SZSE:300052) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Shenzhen Zqgame Co., Ltd (SZSE:300052) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shenzhen Zqgame

What Is Shenzhen Zqgame's Net Debt?

The image below, which you can click on for greater detail, shows that Shenzhen Zqgame had debt of CN¥101.9m at the end of September 2024, a reduction from CN¥136.6m over a year. On the flip side, it has CN¥36.2m in cash leading to net debt of about CN¥65.6m.

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A Look At Shenzhen Zqgame's Liabilities

Zooming in on the latest balance sheet data, we can see that Shenzhen Zqgame had liabilities of CN¥232.5m due within 12 months and liabilities of CN¥126.0m due beyond that. Offsetting these obligations, it had cash of CN¥36.2m as well as receivables valued at CN¥48.6m due within 12 months. So it has liabilities totalling CN¥273.7m more than its cash and near-term receivables, combined.

Since publicly traded Shenzhen Zqgame shares are worth a total of CN¥3.81b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shenzhen Zqgame's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Shenzhen Zqgame had a loss before interest and tax, and actually shrunk its revenue by 2.3%, to CN¥240m. We would much prefer see growth.

Caveat Emptor

Importantly, Shenzhen Zqgame had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥60m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥91m. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Shenzhen Zqgame that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.