Is Zhongshi Minan Holdings (HKG:8283) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Zhongshi Minan Holdings Limited (HKG:8283) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Zhongshi Minan Holdings

How Much Debt Does Zhongshi Minan Holdings Carry?

As you can see below, at the end of June 2024, Zhongshi Minan Holdings had S$3.32m of debt, up from S$2.27m a year ago. Click the image for more detail. However, it does have S$4.61m in cash offsetting this, leading to net cash of S$1.29m.

How Strong Is Zhongshi Minan Holdings' Balance Sheet?

The latest balance sheet data shows that Zhongshi Minan Holdings had liabilities of S$11.6m due within a year, and liabilities of S$5.84m falling due after that. Offsetting this, it had S$4.61m in cash and S$3.34m in receivables that were due within 12 months. So it has liabilities totalling S$9.45m more than its cash and near-term receivables, combined.

Zhongshi Minan Holdings has a market capitalization of S$18.7m, so it could very likely raise cash to ameliorate 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, Zhongshi Minan Holdings 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 it is Zhongshi Minan 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.

In the last year Zhongshi Minan Holdings had a loss before interest and tax, and actually shrunk its revenue by 12%, to S$22m. That's not what we would hope to see.

So How Risky Is Zhongshi Minan Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Zhongshi Minan Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through S$1.5m of cash and made a loss of S$3.0m. While this does make the company a bit risky, it's important to remember it has net cash of S$1.29m. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Zhongshi Minan Holdings that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.