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 can see that Shenzhen Zqgame Co., Ltd (SZSE:300052) does use debt in its business. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. 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.
View our latest analysis for Shenzhen Zqgame
What Is Shenzhen Zqgame's Debt?
You can click the graphic below for the historical numbers, but it shows that Shenzhen Zqgame had CN¥101.9m of debt in September 2024, down from CN¥136.6m, one year before. On the flip side, it has CN¥36.2m in cash leading to net debt of about CN¥65.6m.
A Look At Shenzhen Zqgame's Liabilities
We can see from the most recent balance sheet that Shenzhen Zqgame had liabilities of CN¥232.5m falling due within a year, 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 its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥273.7m.
Given Shenzhen Zqgame has a market capitalization of CN¥5.60b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Shenzhen Zqgame has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. 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.
Over 12 months, Shenzhen Zqgame made a loss at the EBIT level, and saw its revenue drop to CN¥240m, which is a fall of 2.3%. That's not what we would hope to see.
Caveat Emptor
Over the last twelve months Shenzhen Zqgame produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥60m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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. 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 Shenzhen Zqgame has 2 warning signs (and 1 which shouldn't be ignored) we think 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.
About SZSE:300052
Shenzhen Zqgame
Engages in the development, operation, and distribution of online games in China.
Excellent balance sheet very low.
