Is Zhi Sheng Group Holdings (HKG:8370) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Zhi Sheng Group Holdings Limited (HKG:8370) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zhi Sheng Group Holdings

What Is Zhi Sheng Group Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Zhi Sheng Group Holdings had debt of CN¥80.7m, up from CN¥70.8m in one year. However, it does have CN¥35.9m in cash offsetting this, leading to net debt of about CN¥44.8m.

A Look At Zhi Sheng Group Holdings' Liabilities

According to the balance sheet data, Zhi Sheng Group Holdings had liabilities of CN¥122.8m due within 12 months, but no longer term liabilities. Offsetting this, it had CN¥35.9m in cash and CN¥64.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥22.6m.

This deficit is considerable relative to its market capitalization of CN¥35.2m, so it does suggest shareholders should keep an eye on Zhi Sheng Group Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Zhi Sheng Group Holdings's earnings that will influence how the balance sheet holds up in the future. 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 Zhi Sheng Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 31%, to CN¥76m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Zhi Sheng Group Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥25m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥78m into a profit. In the meantime, we consider the stock very risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Zhi Sheng Group Holdings (including 2 which make us uncomfortable) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.