Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Zhaobangji Properties Holdings Limited (HKG:1660) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
Check out our latest analysis for Zhaobangji Properties Holdings
What Is Zhaobangji Properties Holdings's Net Debt?
As you can see below, at the end of September 2022, Zhaobangji Properties Holdings had HK$28.4m of debt, up from HK$14.0m a year ago. Click the image for more detail. But on the other hand it also has HK$150.9m in cash, leading to a HK$122.5m net cash position.
A Look At Zhaobangji Properties Holdings' Liabilities
According to the last reported balance sheet, Zhaobangji Properties Holdings had liabilities of HK$70.7m due within 12 months, and liabilities of HK$45.8m due beyond 12 months. Offsetting this, it had HK$150.9m in cash and HK$98.3m in receivables that were due within 12 months. So it can boast HK$132.7m more liquid assets than total liabilities.
This surplus suggests that Zhaobangji Properties Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Zhaobangji Properties Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Zhaobangji Properties 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 Zhaobangji Properties Holdings's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
So How Risky Is Zhaobangji Properties Holdings?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Zhaobangji Properties Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$28m of cash and made a loss of HK$30m. With only HK$122.5m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. For riskier companies like Zhaobangji Properties Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.