Is Shenzhen Zhenye (Group)Ltd (SZSE:000006) Using Debt In A Risky Way?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Shenzhen Zhenye (Group) Co.,Ltd. (SZSE:000006) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shenzhen Zhenye (Group)Ltd

What Is Shenzhen Zhenye (Group)Ltd's Debt?

As you can see below, Shenzhen Zhenye (Group)Ltd had CN¥8.07b of debt at March 2024, down from CN¥8.85b a year prior. However, it also had CN¥3.52b in cash, and so its net debt is CN¥4.55b.

How Healthy Is Shenzhen Zhenye (Group)Ltd's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Zhenye (Group)Ltd had liabilities of CN¥12.3b falling due within a year, and liabilities of CN¥6.02b due beyond that. On the other hand, it had cash of CN¥3.52b and CN¥101.0m worth of receivables due within a year. So it has liabilities totalling CN¥14.7b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥4.81b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Shenzhen Zhenye (Group)Ltd would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shenzhen Zhenye (Group)Ltd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Shenzhen Zhenye (Group)Ltd made a loss at the EBIT level, and saw its revenue drop to CN¥2.8b, which is a fall of 23%. To be frank that doesn't bode well.

Caveat Emptor

While Shenzhen Zhenye (Group)Ltd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥373m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of CN¥817m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Shenzhen Zhenye (Group)Ltd , and understanding them should be part of your investment process.

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.