Is Shenzhen Zowee Technology (SZSE:002369) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Shenzhen Zowee Technology Co., Ltd. (SZSE:002369) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shenzhen Zowee Technology

What Is Shenzhen Zowee Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen Zowee Technology had CN¥50.1m of debt in September 2024, down from CN¥115.5m, one year before. But on the other hand it also has CN¥364.9m in cash, leading to a CN¥314.8m net cash position.

How Healthy Is Shenzhen Zowee Technology's Balance Sheet?

The latest balance sheet data shows that Shenzhen Zowee Technology had liabilities of CN¥1.06b due within a year, and liabilities of CN¥838.5m falling due after that. Offsetting this, it had CN¥364.9m in cash and CN¥337.7m in receivables that were due within 12 months. So its liabilities total CN¥1.20b more than the combination of its cash and short-term receivables.

Given Shenzhen Zowee Technology has a market capitalization of CN¥6.97b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Shenzhen Zowee Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shenzhen Zowee Technology'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, Shenzhen Zowee Technology reported revenue of CN¥1.7b, which is a gain of 6.1%, 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.

So How Risky Is Shenzhen Zowee Technology?

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 Shenzhen Zowee Technology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥74m and booked a CN¥360m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥314.8m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Shenzhen Zowee Technology , and understanding them should be part of your investment process.

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.