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Health Check: How Prudently Does Zhaobangji Properties Holdings (HKG:1660) Use Debt?

Simply Wall St ·  09/12/2023 06:50

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Zhaobangji Properties Holdings Limited (HKG:1660) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zhaobangji Properties Holdings

How Much Debt Does Zhaobangji Properties Holdings Carry?

As you can see below, Zhaobangji Properties Holdings had HK$26.0m of debt at March 2023, down from HK$32.7m a year prior. But on the other hand it also has HK$61.2m in cash, leading to a HK$35.2m net cash position.

debt-equity-history-analysis
SEHK:1660 Debt to Equity History September 11th 2023

How Strong Is Zhaobangji Properties Holdings' Balance Sheet?

The latest balance sheet data shows that Zhaobangji Properties Holdings had liabilities of HK$97.4m due within a year, and liabilities of HK$26.2m falling due after that. On the other hand, it had cash of HK$61.2m and HK$145.2m worth of receivables due within a year. So it can boast HK$82.8m 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Zhaobangji Properties Holdings made a loss at the EBIT level, and saw its revenue drop to HK$258m, which is a fall of 5.0%. We would much prefer see growth.

So How Risky Is Zhaobangji Properties Holdings?

Although Zhaobangji Properties Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$127m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 2 warning signs for Zhaobangji Properties Holdings (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more
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