Would Shenzhen Zqgame (SZSE:300052) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Shenzhen Zqgame Co., Ltd (SZSE:300052) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out our latest analysis for Shenzhen Zqgame

What Is Shenzhen Zqgame's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Shenzhen Zqgame had debt of CN¥136.6m, up from CN¥85.0m in one year. However, it also had CN¥57.1m in cash, and so its net debt is CN¥79.5m.

A Look At Shenzhen Zqgame's Liabilities

The latest balance sheet data shows that Shenzhen Zqgame had liabilities of CN¥250.4m due within a year, and liabilities of CN¥141.6m falling due after that. Offsetting this, it had CN¥57.1m in cash and CN¥114.4m in receivables that were due within 12 months. So it has liabilities totalling CN¥220.4m more than its cash and near-term receivables, combined.

Since publicly traded Shenzhen Zqgame shares are worth a total of CN¥4.24b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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¥245m, which is a fall of 19%. We would much prefer see growth.

Caveat Emptor

Not only did Shenzhen Zqgame's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥64m 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. However, it doesn't help that it burned through CN¥17m of cash over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Shenzhen Zqgame 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.