Zhongfu Information (SZSE:300659) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Zhongfu Information Inc. (SZSE:300659) does have debt on its balance sheet. 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. 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. 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.

See our latest analysis for Zhongfu Information

What Is Zhongfu Information's Net Debt?

The image below, which you can click on for greater detail, shows that Zhongfu Information had debt of CN¥200.2m at the end of March 2024, a reduction from CN¥331.7m over a year. But on the other hand it also has CN¥571.8m in cash, leading to a CN¥371.6m net cash position.

A Look At Zhongfu Information's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhongfu Information had liabilities of CN¥496.6m due within 12 months and liabilities of CN¥36.0m due beyond that. Offsetting this, it had CN¥571.8m in cash and CN¥489.3m in receivables that were due within 12 months. So it actually has CN¥528.5m 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. There's no doubt that we learn most about debt from the balance sheet. But it is Zhongfu Information's earnings that will influence how the balance sheet holds up in the future. 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 Zhongfu Information wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to CN¥913m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Zhongfu Information?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Zhongfu Information lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥179m and booked a CN¥145m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥371.6m. That kitty means the company can keep spending for growth for at least two years, at current rates. Zhongfu Information's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Zhongfu Information (1 is significant) 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.