Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Zanyu Technology Group Co., Ltd. (SZSE:002637) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Zanyu Technology Group
What Is Zanyu Technology Group's Net Debt?
As you can see below, Zanyu Technology Group had CN¥2.84b of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥804.2m in cash leading to net debt of about CN¥2.03b.
How Strong Is Zanyu Technology Group's Balance Sheet?
The latest balance sheet data shows that Zanyu Technology Group had liabilities of CN¥3.24b due within a year, and liabilities of CN¥1.28b falling due after that. Offsetting these obligations, it had cash of CN¥804.2m as well as receivables valued at CN¥1.31b due within 12 months. So its liabilities total CN¥2.41b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Zanyu Technology Group is worth CN¥4.38b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Zanyu Technology Group'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 Zanyu Technology Group had a loss before interest and tax, and actually shrunk its revenue by 19%, to CN¥10.0b. That's not what we would hope to see.
Caveat Emptor
Not only did Zanyu Technology Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥304m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥448m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Zanyu Technology Group you should be aware of.
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.
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