Zensun Enterprises (HKG: 185) appears to be using a lot of debt


Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, Zensun Enterprises Limited (HKG: 185) carries the debt. But the real question is whether this debt makes the business risky.

When Is Debt a Problem?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

See our latest review for Zensun Enterprises

What is the net debt of Zensun Enterprises?

You can click on the graph below for historical figures, but it shows that Zensun Enterprises had CN 23.8 billion debt in June 2021, up from CN ¥ 30.4 billion a year earlier. However, given that it has a cash reserve of CNN 2.42 billion, its net debt is less, at around CNN 21.3 billion.

SEHK: 185 History of debt to equity August 31, 2021

How strong is Zensun Enterprises’ balance sheet?

The latest balance sheet data shows that Zensun Enterprises had debts of CN 54.4 billion maturing within one year, and debts of CN 6.97 billion maturing after that. In return, he had CN 2.42 billion in cash and CN 140.2 million in receivables due within 12 months. Its liabilities are therefore CN 58.8 billion more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN ¥ 9.53b company, like a colossus towering over mere mortals. We therefore believe that shareholders should watch it closely. After all, Zensun Enterprises would likely need a major recapitalization if it were to pay its creditors today.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

As it turns out, Zensun Enterprises has a rather worrying net debt to EBITDA ratio of 23.7 but very strong interest coverage of 31.9. This means that unless the business has access to very cheap debt, these interest charges will likely increase in the future. It is important to note that Zensun Enterprises’ EBIT has fallen 63% over the past twelve months. If this earnings trend continues, paying off debt will be about as easy as driving cats on a roller coaster. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is the profits of Zensun Enterprises that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Finally, a business can only pay off its debts with hard cash, not with book profits. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Zensun Enterprises has spent a lot of money. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.

Our point of view

At first glance, Zensun Enterprises’ EBIT growth rate left us hesitant about the stock, and its total liability level was no more attractive than the single empty restaurant on the busiest night of the year. But on the bright side, his interest coverage is a good sign and makes us more optimistic. We believe that the chances that Zensun Enterprises have too much debt are very high. In our opinion, this means that the stock is rather risky, and probably one to be avoided; but to each their own (investment) style. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 4 warning signs for Zensun Enterprises you need to be aware, and 2 of them are potentially serious.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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