- Hong Kong
- /
- Trade Distributors
- /
- SEHK:2098
Zall Smart Commerce Group (HKG:2098) Has Debt But No Earnings; Should You Worry?
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.' 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 can see that Zall Smart Commerce Group Ltd. (HKG:2098) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
Check out the opportunities and risks within the HK Trade Distributors industry.
What Is Zall Smart Commerce Group's Net Debt?
As you can see below, at the end of June 2022, Zall Smart Commerce Group had CN¥17.5b of debt, up from CN¥16.7b a year ago. Click the image for more detail. However, it also had CN¥1.71b in cash, and so its net debt is CN¥15.8b.
How Healthy Is Zall Smart Commerce Group's Balance Sheet?
According to the last reported balance sheet, Zall Smart Commerce Group had liabilities of CN¥37.6b due within 12 months, and liabilities of CN¥8.45b due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.71b as well as receivables valued at CN¥11.1b due within 12 months. So its liabilities total CN¥33.3b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the CN¥5.19b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Zall Smart Commerce Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zall Smart Commerce Group'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, Zall Smart Commerce Group reported revenue of CN¥104b, which is a gain of 20%, 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.
Caveat Emptor
Over the last twelve months Zall Smart Commerce Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥53m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥1.4b in the last year. So we're not very excited about owning this stock. Its too risky for us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Zall Smart Commerce Group has 3 warning signs (and 2 which are concerning) we think you should know about.
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.
Valuation is complex, but we're here to simplify it.
Discover if Zall Smart Commerce Group might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
Access Free AnalysisHave feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About SEHK:2098
Zall Smart Commerce Group
An investment holding company, engages in the supply chain management and trading businesses in the People’s Republic of China and Singapore.
Low with poor track record.