Warren Buffett famously said, '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 note that Shenzhen Zhenye (Group) Co.,Ltd. (SZSE:000006) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Shenzhen Zhenye (Group)Ltd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shenzhen Zhenye (Group)Ltd had CN¥6.97b of debt in September 2024, down from CN¥8.92b, one year before. However, it also had CN¥2.75b in cash, and so its net debt is CN¥4.22b.

How Strong Is Shenzhen Zhenye (Group)Ltd's Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Zhenye (Group)Ltd had liabilities of CN¥8.65b falling due within a year, and liabilities of CN¥5.43b due beyond that. On the other hand, it had cash of CN¥2.75b and CN¥155.3m worth of receivables due within a year. So its liabilities total CN¥11.2b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CN¥11.2b, we think shareholders really should watch Shenzhen Zhenye (Group)Ltd's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shenzhen Zhenye (Group)Ltd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Shenzhen Zhenye (Group)Ltd wasn't profitable at an EBIT level, but managed to grow its revenue by 124%, to CN¥6.8b. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though Shenzhen Zhenye (Group)Ltd managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥413m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of CN¥1.3b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. For example, we've discovered 3 warning signs for Shenzhen Zhenye (Group)Ltd that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.