Is Zhejiang Shibao (HKG:1057) A Risky Investment?

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.' 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. We note that Zhejiang Shibao Company Limited (HKG:1057) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Zhejiang Shibao

What Is Zhejiang Shibao's Debt?

As you can see below, Zhejiang Shibao had CN¥113.9m of debt at June 2021, down from CN¥134.9m a year prior. But on the other hand it also has CN¥220.8m in cash, leading to a CN¥106.9m net cash position.

How Healthy Is Zhejiang Shibao's Balance Sheet?

The latest balance sheet data shows that Zhejiang Shibao had liabilities of CN¥607.3m due within a year, and liabilities of CN¥51.5m falling due after that. Offsetting this, it had CN¥220.8m in cash and CN¥508.7m in receivables that were due within 12 months. So it actually has CN¥70.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang Shibao could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Zhejiang Shibao boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Zhejiang Shibao turned things around in the last 12 months, delivering and EBIT of CN¥29m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zhejiang Shibao'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Zhejiang Shibao has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Zhejiang Shibao actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Shibao has net cash of CN¥106.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥44m, being 152% of its EBIT. So we don't think Zhejiang Shibao's use of debt is risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Zhejiang Shibao (including 1 which shouldn't be ignored) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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