Zhongzheng International (HKG: 943) has debt but no profit; Should we be worried?
Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Zhongzheng International Company Limited (HKG: 943) uses debt. But does this debt concern shareholders?
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 can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest analysis for Zhongzheng International
What is Zhongzheng International’s net debt?
As you can see below, at the end of June 2021, Zhongzheng International was in debt of HK $ 1.96 billion, up from HK $ 1.74 billion a year ago. Click on the image for more details. However, he also had HK $ 418.7 million in cash, so his net debt is HK $ 1.54 billion.
How strong is Zhongzheng International’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Zhongzheng International had HK $ 2.08 billion liabilities due within 12 months and HK $ 809.2 million liabilities due beyond. In return, he had HK $ 418.7 million in cash and HK $ 584.8 million in receivables due within 12 months. It therefore has liabilities totaling HK $ 1.89 billion more than its cash and short-term receivables combined.
The lack here weighs heavily on the HK $ 289.5million business itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. We therefore believe that shareholders should watch it closely. Ultimately, Zhongzheng International would likely need a major recapitalization if its creditors demanded repayment. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Zhongzheng International 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.
In the past year, Zhongzheng International incurred a loss before interest and taxes, and in fact reduced its revenue by 27%, to HK $ 126 million. To be frank, that doesn’t bode well.
While Zhongzheng International’s declining income is about as heartwarming as a wet blanket, its earnings before interest and taxes (EBIT) can be said to be even less attractive. Its EBIT loss was HK $ 150 million. Thinking about this and the large total liabilities, it’s hard to know what to say about the stock due to our intense de-refinement for it. Like all long shots, we’re sure it has a brilliant presentation outlining its blue sky potential. But the reality is that he has few liquid assets compared to liabilities and lost HK $ 156 million last year. We therefore believe that buying this stock is risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Concrete example: we have spotted 2 warning signs for Zhongzheng International you need to be aware of it, and one of them is a little rude.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
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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