Is Zhongzheng International (HKG:943) Using Debt In A Risky Way?

Warren Buffett famously said, '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. We note that Zhongzheng International Company Limited (HKG:943) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Zhongzheng International

How Much Debt Does Zhongzheng International Carry?

As you can see below, Zhongzheng International had HK$558.9m of debt at December 2021, down from HK$1.62b a year prior. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Zhongzheng International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhongzheng International had liabilities of HK$3.25b due within 12 months and liabilities of HK$13.9m due beyond that. On the other hand, it had cash of HK$4.17m and HK$198.1m worth of receivables due within a year. So it has liabilities totalling HK$3.06b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$214.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Zhongzheng International would likely require a major re-capitalisation if it had to pay its creditors today. 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 Zhongzheng International 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.

Over 12 months, Zhongzheng International made a loss at the EBIT level, and saw its revenue drop to HK$130m, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

Not only did Zhongzheng International's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$51m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$67m in the last year. So we think buying this stock is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Zhongzheng International (including 1 which makes us a bit uncomfortable) .

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.