Does Zhi Sheng Group Holdings (HKG:8370) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Zhi Sheng Group Holdings Limited (HKG:8370) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Zhi Sheng Group Holdings

How Much Debt Does Zhi Sheng Group Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2020 Zhi Sheng Group Holdings had debt of CN¥38.8m, up from none in one year. But on the other hand it also has CN¥69.9m in cash, leading to a CN¥31.1m net cash position.

How Healthy Is Zhi Sheng Group Holdings's Balance Sheet?

According to the last reported balance sheet, Zhi Sheng Group Holdings had liabilities of CN¥63.2m due within 12 months, and liabilities of CN¥45.4m due beyond 12 months. Offsetting this, it had CN¥69.9m in cash and CN¥37.0m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Zhi Sheng Group Holdings's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥214.6m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Zhi Sheng Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zhi Sheng Group Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Zhi Sheng Group Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 71%, to CN¥79m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Zhi Sheng Group Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Zhi Sheng Group Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥3.8m of cash and made a loss of CN¥26m. But the saving grace is the CN¥31.1m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Zhi Sheng Group Holdings may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Case in point: We've spotted 4 warning signs for Zhi Sheng Group Holdings you should be aware of, and 1 of them is a bit concerning.

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. 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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