Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that Shenzhen Zowee Technology Co., Ltd. (SZSE:002369) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Shenzhen Zowee Technology
What Is Shenzhen Zowee Technology's Net Debt?
The image below, which you can click on for greater detail, shows that Shenzhen Zowee Technology had debt of CN¥129.2m at the end of June 2023, a reduction from CN¥164.5m over a year. However, it does have CN¥386.4m in cash offsetting this, leading to net cash of CN¥257.2m.
A Look At Shenzhen Zowee Technology's Liabilities
Zooming in on the latest balance sheet data, we can see that Shenzhen Zowee Technology had liabilities of CN¥1.18b due within 12 months and liabilities of CN¥833.2m due beyond that. On the other hand, it had cash of CN¥386.4m and CN¥412.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.21b.
This deficit isn't so bad because Shenzhen Zowee Technology is worth CN¥4.00b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Shenzhen Zowee Technology boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shenzhen Zowee Technology will need earnings to service that debt. 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, Shenzhen Zowee Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.8b, which is a fall of 13%. We would much prefer see growth.
So How Risky Is Shenzhen Zowee Technology?
Although Shenzhen Zowee Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥102m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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 2 warning signs for Shenzhen Zowee Technology you should be aware of.
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.
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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.