Is ZKH Group (NYSE:ZKH) 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 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 ZKH Group Limited (NYSE:ZKH) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for ZKH Group

What Is ZKH Group's Net Debt?

As you can see below, at the end of March 2024, ZKH Group had CN¥701.0m of debt, up from CN¥560.2m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.89b in cash, leading to a CN¥1.18b net cash position.

A Look At ZKH Group's Liabilities

According to the last reported balance sheet, ZKH Group had liabilities of CN¥3.59b due within 12 months, and liabilities of CN¥130.2m due beyond 12 months. Offsetting this, it had CN¥1.89b in cash and CN¥3.63b in receivables that were due within 12 months. So it can boast CN¥1.80b more liquid assets than total liabilities.

This excess liquidity is a great indication that ZKH Group's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, ZKH Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ZKH Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, ZKH Group reported revenue of CN¥8.6b, which is a gain of 3.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is ZKH Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months ZKH Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥624m of cash and made a loss of CN¥901m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.18b. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. To that end, you should be aware of the 1 warning sign we've spotted with ZKH Group .

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.

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