Is Zioncom Holdings (HKG:8287) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Zioncom Holdings Limited (HKG:8287) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Zioncom Holdings

How Much Debt Does Zioncom Holdings Carry?

The chart below, which you can click on for greater detail, shows that Zioncom Holdings had HK$94.9m in debt in June 2022; about the same as the year before. However, it also had HK$6.13m in cash, and so its net debt is HK$88.7m.

How Healthy Is Zioncom Holdings' Balance Sheet?

The latest balance sheet data shows that Zioncom Holdings had liabilities of HK$381.2m due within a year, and liabilities of HK$5.39m falling due after that. On the other hand, it had cash of HK$6.13m and HK$72.4m worth of receivables due within a year. So its liabilities total HK$308.1m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$43.6m 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 it is Zioncom Holdings's earnings that will influence how the balance sheet holds up in the future. 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 8.9%, to HK$594m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Zioncom Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$42m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. 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 HK$47m in the last year. So we're not very excited about owning this stock. Its too risky for us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Zioncom Holdings 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.