Stock Analysis

Here's Why Zhaobangji Properties Holdings (HKG:1660) Can Manage Its Debt Responsibly

SEHK:1660
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Zhaobangji Properties Holdings Limited (HKG:1660) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

View 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$14.0m of debt in September 2021, down from HK$19.9m, one year before. However, its balance sheet shows it holds HK$217.3m in cash, so it actually has HK$203.3m net cash.

debt-equity-history-analysis
SEHK:1660 Debt to Equity History February 16th 2022

How Healthy Is Zhaobangji Properties Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhaobangji Properties Holdings had liabilities of HK$87.6m due within 12 months and liabilities of HK$33.4m due beyond that. Offsetting this, it had HK$217.3m in cash and HK$80.4m in receivables that were due within 12 months. So it can boast HK$176.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhaobangji Properties Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

On the other hand, Zhaobangji Properties Holdings's EBIT dived 11%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Zhaobangji Properties Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Zhaobangji Properties Holdings's free cash flow amounted to 25% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Zhaobangji Properties Holdings has net cash of HK$203.3m, as well as more liquid assets than liabilities. So we are not troubled with Zhaobangji Properties Holdings's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Zhaobangji Properties Holdings (of which 1 is a bit concerning!) you should know about.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Zhaobangji Lifestyle Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.