Is Zhongfu Information (SZSE:300659) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Zhongfu Information Inc. (SZSE:300659) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Zhongfu Information

What Is Zhongfu Information's Debt?

As you can see below, Zhongfu Information had CN¥228.7m of debt at June 2024, down from CN¥285.8m a year prior. However, it does have CN¥477.1m in cash offsetting this, leading to net cash of CN¥248.4m.

How Strong Is Zhongfu Information's Balance Sheet?

The latest balance sheet data shows that Zhongfu Information had liabilities of CN¥455.9m due within a year, and liabilities of CN¥30.6m falling due after that. On the other hand, it had cash of CN¥477.1m and CN¥484.4m worth of receivables due within a year. So it can boast CN¥475.1m more liquid assets than total liabilities.

This surplus suggests that Zhongfu Information has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Zhongfu Information has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Zhongfu Information will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Zhongfu Information reported revenue of CN¥874m, which is a gain of 21%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Zhongfu Information?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Zhongfu Information had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥224m and booked a CN¥135m accounting loss. However, it has net cash of CN¥248.4m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Zhongfu Information may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Be aware that Zhongfu Information is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.