Health Check: How Prudently Does Zioncom Holdings (HKG:8287) Use Debt?

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.' 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 can see that Zioncom Holdings Limited (HKG:8287) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Zioncom Holdings

What Is Zioncom Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Zioncom Holdings had debt of HK$108.6m, up from HK$83.5m in one year. However, it also had HK$22.4m in cash, and so its net debt is HK$86.2m.

How Strong Is Zioncom Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zioncom Holdings had liabilities of HK$329.9m due within 12 months and liabilities of HK$5.85m due beyond that. Offsetting this, it had HK$22.4m in cash and HK$48.0m in receivables that were due within 12 months. So it has liabilities totalling HK$265.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$52.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Zioncom Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zioncom Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Zioncom Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 2.2%, to HK$621m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Zioncom Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping HK$29m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of HK$46m in the last year. So we think this stock is quite risky. We'd prefer to pass. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Zioncom Holdings is showing 3 warning signs in our investment analysis , and 2 of those are concerning...

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.