Is Shenzhen Zhenye (Group)Ltd (SZSE:000006) Using Debt Sensibly?

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. As with many other companies Shenzhen Zhenye (Group) Co.,Ltd. (SZSE:000006) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen Zhenye (Group)Ltd had CN¥6.97b of debt in September 2024, down from CN¥8.92b, one year before. However, it does have CN¥2.75b in cash offsetting this, leading to net debt of about CN¥4.22b.

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

Zooming in on the latest balance sheet data, we can see that Shenzhen Zhenye (Group)Ltd had liabilities of CN¥8.65b due within 12 months and liabilities of CN¥5.43b due beyond that. Offsetting this, it had CN¥2.75b in cash and CN¥155.3m in receivables that were due within 12 months. So its liabilities total CN¥11.2b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CN¥9.83b, we think shareholders really should watch Shenzhen Zhenye (Group)Ltd's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shenzhen Zhenye (Group)Ltd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Shenzhen Zhenye (Group)Ltd wasn't profitable at an EBIT level, but managed to grow its revenue by 124%, to CN¥6.8b. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though Shenzhen Zhenye (Group)Ltd managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CN¥413m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CN¥1.3b. And until that time we think this is a risky stock. 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 3 warning signs with Shenzhen Zhenye (Group)Ltd (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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.