Is Fujian Zhangzhou DevelopmentLTD (SZSE:000753) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Fujian Zhangzhou Development Co.,LTD. (SZSE:000753) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Fujian Zhangzhou DevelopmentLTD

What Is Fujian Zhangzhou DevelopmentLTD's Debt?

As you can see below, at the end of September 2024, Fujian Zhangzhou DevelopmentLTD had CN¥4.62b of debt, up from CN¥3.70b a year ago. Click the image for more detail. However, it does have CN¥516.5m in cash offsetting this, leading to net debt of about CN¥4.10b.

How Strong Is Fujian Zhangzhou DevelopmentLTD's Balance Sheet?

According to the last reported balance sheet, Fujian Zhangzhou DevelopmentLTD had liabilities of CN¥4.60b due within 12 months, and liabilities of CN¥3.06b due beyond 12 months. On the other hand, it had cash of CN¥516.5m and CN¥2.15b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.99b.

This is a mountain of leverage relative to its market capitalization of CN¥5.24b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Fujian Zhangzhou DevelopmentLTD'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, Fujian Zhangzhou DevelopmentLTD reported revenue of CN¥3.5b, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Fujian Zhangzhou DevelopmentLTD produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥25m. 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. However, it doesn't help that it burned through CN¥534m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Fujian Zhangzhou DevelopmentLTD (2 are concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.