We Think Zhi Sheng Group Holdings (HKG:8370) Has A Fair Chunk Of Debt

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.' 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. As with many other companies Zhi Sheng Group Holdings Limited (HKG:8370) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Zhi Sheng Group Holdings

What Is Zhi Sheng Group Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Zhi Sheng Group Holdings had debt of CN¥77.9m, up from CN¥64.8m in one year. However, because it has a cash reserve of CN¥33.8m, its net debt is less, at about CN¥44.1m.

A Look At Zhi Sheng Group Holdings' Liabilities

According to the balance sheet data, Zhi Sheng Group Holdings had liabilities of CN¥126.7m due within 12 months, but no longer term liabilities. Offsetting this, it had CN¥33.8m in cash and CN¥100.9m in receivables that were due within 12 months. So it actually has CN¥7.92m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhi Sheng Group 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 it is Zhi Sheng Group Holdings'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.

In the last year Zhi Sheng Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 3.6%, to CN¥111m. We would much prefer see growth.

Caveat Emptor

Importantly, Zhi Sheng Group Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥11m. 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. This one is a bit too risky for our liking. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Zhi Sheng Group Holdings (of which 1 is significant!) 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.

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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.