Is Zhaoke Ophthalmology (HKG:6622) Weighed On By Its Debt Load?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Zhaoke Ophthalmology Limited (HKG:6622) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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, 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.

What Is Zhaoke Ophthalmology's Debt?

The image below, which you can click on for greater detail, shows that at June 2025 Zhaoke Ophthalmology had debt of CN¥247.6m, up from CN¥224.6m in one year. But it also has CN¥1.05b in cash to offset that, meaning it has CN¥806.6m net cash.

How Strong Is Zhaoke Ophthalmology's Balance Sheet?

We can see from the most recent balance sheet that Zhaoke Ophthalmology had liabilities of CN¥335.1m falling due within a year, and liabilities of CN¥27.5m due beyond that. Offsetting this, it had CN¥1.05b in cash and CN¥63.2m in receivables that were due within 12 months. So it can boast CN¥754.9m more liquid assets than total liabilities.

This surplus strongly suggests that Zhaoke Ophthalmology has a rock-solid balance sheet (and the debt is of no concern whatsoever). 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 Zhaoke Ophthalmology has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zhaoke Ophthalmology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Check out our latest analysis for Zhaoke Ophthalmology

In the last year Zhaoke Ophthalmology had a loss before interest and tax, and actually shrunk its revenue by 38%, to CN¥35m. To be frank that doesn't bode well.

So How Risky Is Zhaoke Ophthalmology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Zhaoke Ophthalmology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥272m of cash and made a loss of CN¥278m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥806.6m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example - Zhaoke Ophthalmology has 1 warning sign we think you should be aware of.

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.