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

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. Importantly, Zhongfu Information Inc. (SZSE:300659) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Zhongfu Information

How Much Debt Does Zhongfu Information Carry?

You can click the graphic below for the historical numbers, but it shows that Zhongfu Information had CN¥249.6m of debt in September 2024, down from CN¥285.1m, one year before. But it also has CN¥454.6m in cash to offset that, meaning it has CN¥205.0m net cash.

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¥494.6m due within 12 months and liabilities of CN¥29.9m due beyond that. On the other hand, it had cash of CN¥454.6m and CN¥468.9m worth of receivables due within a year. So it actually has CN¥399.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhongfu Information could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Zhongfu Information boasts net cash, so it's fair to say it does not have a heavy debt load! 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¥882m, which is a gain of 21%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Zhongfu Information?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Zhongfu Information lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥168m of cash and made a loss of CN¥109m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥205.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Zhongfu Information may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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 instance, we've identified 3 warning signs for Zhongfu Information (2 are a bit unpleasant) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.