Zengame Technology Holding (HKG:2660) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Zengame Technology Holding Limited (HKG:2660) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Zengame Technology Holding

What Is Zengame Technology Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Zengame Technology Holding had CN¥13.5m of debt, an increase on CN¥9.12m, over one year. But it also has CN¥1.33b in cash to offset that, meaning it has CN¥1.32b net cash.

A Look At Zengame Technology Holding's Liabilities

The latest balance sheet data shows that Zengame Technology Holding had liabilities of CN¥262.7m due within a year, and liabilities of CN¥22.2m falling due after that. Offsetting these obligations, it had cash of CN¥1.33b as well as receivables valued at CN¥161.8m due within 12 months. So it actually has CN¥1.21b 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. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Zengame Technology Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Zengame Technology Holding grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Zengame Technology Holding's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Zengame Technology Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Zengame Technology Holding generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zengame Technology Holding has CN¥1.32b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥726m, being 99% of its EBIT. The bottom line is that we do not find Zengame Technology Holding's debt levels at all concerning. 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. Be aware that Zengame Technology Holding is showing 2 warning signs in our investment analysis , 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.