Does Zhonghua Gas Holdings (HKG:8246) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Zhonghua Gas Holdings Limited (HKG:8246) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Zhonghua Gas Holdings

What Is Zhonghua Gas Holdings's Debt?

As you can see below, Zhonghua Gas Holdings had CN¥78.8m of debt at December 2021, down from CN¥98.2m a year prior. However, it does have CN¥60.8m in cash offsetting this, leading to net debt of about CN¥18.0m.

How Healthy Is Zhonghua Gas Holdings' Balance Sheet?

The latest balance sheet data shows that Zhonghua Gas Holdings had liabilities of CN¥132.5m due within a year, and liabilities of CN¥81.7m falling due after that. Offsetting these obligations, it had cash of CN¥60.8m as well as receivables valued at CN¥230.1m due within 12 months. So it can boast CN¥76.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhonghua Gas Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Zhonghua Gas 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.

In the last year Zhonghua Gas Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 73%, to CN¥421m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Zhonghua Gas Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping CN¥210m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. 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 Zhonghua Gas Holdings has 2 warning signs (and 1 which can't be ignored) we think 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.

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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.