Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Shenzhen Zqgame Co., Ltd (SZSE:300052) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Shenzhen Zqgame
What Is Shenzhen Zqgame's Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Shenzhen Zqgame had debt of CN¥136.6m, up from CN¥85.0m in one year. On the flip side, it has CN¥57.1m in cash leading to net debt of about CN¥79.5m.
How Healthy Is Shenzhen Zqgame's Balance Sheet?
According to the last reported balance sheet, Shenzhen Zqgame had liabilities of CN¥250.4m due within 12 months, and liabilities of CN¥141.6m due beyond 12 months. On the other hand, it had cash of CN¥57.1m and CN¥114.4m worth of receivables due within a year. So it has liabilities totalling CN¥220.4m more than its cash and near-term receivables, combined.
Given Shenzhen Zqgame has a market capitalization of CN¥4.88b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shenzhen Zqgame can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Shenzhen Zqgame had a loss before interest and tax, and actually shrunk its revenue by 19%, to CN¥245m. We would much prefer see growth.
Caveat Emptor
While Shenzhen Zqgame's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥64m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥17m in negative free cash flow over the last twelve months. So to be blunt we think it is 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 - Shenzhen Zqgame has 1 warning sign we think 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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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.