We Think Zengame Technology Holding (HKG:2660) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Zengame Technology Holding Limited (HKG:2660) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Zengame Technology Holding

What Is Zengame Technology Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Zengame Technology Holding had CN¥11.3m of debt in June 2021, down from CN¥18.2m, one year before. However, it does have CN¥798.9m in cash offsetting this, leading to net cash of CN¥787.7m.

How Strong Is Zengame Technology Holding's Balance Sheet?

According to the last reported balance sheet, Zengame Technology Holding had liabilities of CN¥164.4m due within 12 months, and liabilities of CN¥1.91m due beyond 12 months. Offsetting this, it had CN¥798.9m in cash and CN¥146.9m in receivables that were due within 12 months. So it can boast CN¥779.6m more liquid assets than total liabilities.

This surplus liquidity suggests that Zengame Technology Holding's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Zengame Technology Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Zengame Technology Holding grew its EBIT by 17% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zengame Technology Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Zengame Technology Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Zengame Technology Holding recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Zengame Technology Holding has net cash of CN¥787.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥239m, being 84% of its EBIT. At the end of the day we're not concerned about Zengame Technology Holding's debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Zengame Technology Holding , and understanding them should be part of your investment process.

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. 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.
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