Does Zhi Sheng Group Holdings (HKG:8370) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Zhi Sheng Group Holdings Limited (HKG:8370) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zhi Sheng Group Holdings

How Much Debt Does Zhi Sheng Group Holdings Carry?

As you can see below, at the end of December 2021, Zhi Sheng Group Holdings had CN¥58.4m of debt, up from CN¥37.0m a year ago. Click the image for more detail. On the flip side, it has CN¥47.6m in cash leading to net debt of about CN¥10.8m.

How Strong Is Zhi Sheng Group Holdings' Balance Sheet?

The latest balance sheet data shows that Zhi Sheng Group Holdings had liabilities of CN¥42.8m due within a year, and liabilities of CN¥68.5m falling due after that. On the other hand, it had cash of CN¥47.6m and CN¥25.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥38.1m.

While this might seem like a lot, it is not so bad since Zhi Sheng Group Holdings has a market capitalization of CN¥156.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 had a loss before interest and tax, and actually shrunk its revenue by 9.9%, to CN¥74m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Zhi Sheng Group Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥41m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥39m into a profit. In the meantime, we consider the stock very risky. 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. For example, we've discovered 3 warning signs for Zhi Sheng Group Holdings (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.