Is Zig Sheng Industrial (TPE:1455) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Zig Sheng Industrial Co., Ltd. (TPE:1455) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Zig Sheng Industrial

What Is Zig Sheng Industrial's Net Debt?

The image below, which you can click on for greater detail, shows that Zig Sheng Industrial had debt of NT$1.20b at the end of September 2020, a reduction from NT$1.85b over a year. However, it also had NT$398.1m in cash, and so its net debt is NT$801.9m.

How Healthy Is Zig Sheng Industrial's Balance Sheet?

According to the last reported balance sheet, Zig Sheng Industrial had liabilities of NT$1.95b due within 12 months, and liabilities of NT$344.7m due beyond 12 months. On the other hand, it had cash of NT$398.1m and NT$1.08b worth of receivables due within a year. So it has liabilities totalling NT$815.7m more than its cash and near-term receivables, combined.

Since publicly traded Zig Sheng Industrial shares are worth a total of NT$4.82b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zig Sheng Industrial 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 Zig Sheng Industrial had a loss before interest and tax, and actually shrunk its revenue by 40%, to NT$7.9b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Zig Sheng Industrial's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable NT$674m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of NT$531m. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Zig Sheng Industrial (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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