Stock Analysis

Does Zhaobangji Properties Holdings (HKG:1660) Have A Healthy Balance Sheet?

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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Zhaobangji Properties Holdings Limited (HKG:1660) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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 Zhaobangji Properties Holdings

What Is Zhaobangji Properties Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Zhaobangji Properties Holdings had HK$19.9m of debt in September 2020, down from HK$53.3m, one year before. But it also has HK$137.8m in cash to offset that, meaning it has HK$117.9m net cash.

SEHK:1660 Debt to Equity History December 24th 2020

How Strong Is Zhaobangji Properties Holdings's Balance Sheet?

We can see from the most recent balance sheet that Zhaobangji Properties Holdings had liabilities of HK$78.1m falling due within a year, and liabilities of HK$45.5m due beyond that. On the other hand, it had cash of HK$137.8m and HK$67.6m worth of receivables due within a year. So it actually has HK$81.9m more liquid assets than total liabilities.

Having regard to Zhaobangji Properties Holdings's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the HK$6.20b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Zhaobangji Properties Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Zhaobangji Properties Holdings has boosted its EBIT by 44%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Zhaobangji Properties Holdings will need earnings to service that debt. 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 Zhaobangji Properties Holdings 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. In the last three years, Zhaobangji Properties Holdings created free cash flow amounting to 8.6% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Zhaobangji Properties Holdings has HK$117.9m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 44% over the last year. So is Zhaobangji Properties Holdings's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Zhaobangji Properties Holdings's earnings per share history for free.

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. 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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