Does Zhenro Properties Group (HKG:6158) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Zhenro Properties Group Limited (HKG:6158) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zhenro Properties Group

What Is Zhenro Properties Group's Debt?

As you can see below, Zhenro Properties Group had CN¥62.8b of debt at June 2022, down from CN¥72.3b a year prior. However, because it has a cash reserve of CN¥14.6b, its net debt is less, at about CN¥48.3b.

How Healthy Is Zhenro Properties Group's Balance Sheet?

The latest balance sheet data shows that Zhenro Properties Group had liabilities of CN¥153.3b due within a year, and liabilities of CN¥33.9b falling due after that. Offsetting this, it had CN¥14.6b in cash and CN¥21.5b in receivables that were due within 12 months. So its liabilities total CN¥151.1b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥872.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Zhenro Properties Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zhenro Properties Group 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.

In the last year Zhenro Properties Group had a loss before interest and tax, and actually shrunk its revenue by 10.0%, to CN¥34b. That's not what we would hope to see.

Caveat Emptor

Importantly, Zhenro Properties Group had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥1.1b. 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 CN¥3.0b 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Zhenro Properties Group is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.