Is Zhenro Services Group (HKG:6958) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Zhenro Services Group Limited (HKG:6958) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Zhenro Services Group

How Much Debt Does Zhenro Services Group Carry?

As you can see below, Zhenro Services Group had CN¥69.1m of debt at June 2024, down from CN¥92.2m a year prior. But on the other hand it also has CN¥550.5m in cash, leading to a CN¥481.4m net cash position.

A Look At Zhenro Services Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhenro Services Group had liabilities of CN¥694.5m due within 12 months and liabilities of CN¥176.9m due beyond that. Offsetting these obligations, it had cash of CN¥550.5m as well as receivables valued at CN¥341.0m due within 12 months. So it can boast CN¥20.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhenro Services Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Zhenro Services Group has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Zhenro Services Group 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.

In the last year Zhenro Services Group had a loss before interest and tax, and actually shrunk its revenue by 4.8%, to CN¥1.1b. We would much prefer see growth.

So How Risky Is Zhenro Services Group?

Although Zhenro Services Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥96m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Zhenro Services Group (1 is a bit unpleasant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.