Is Zhonghua Gas Holdings (HKG:8246) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Zhonghua Gas Holdings Limited (HKG:8246) makes use of 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. 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. 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.

Check out our latest analysis for Zhonghua Gas Holdings

How Much Debt Does Zhonghua Gas Holdings Carry?

The image below, which you can click on for greater detail, shows that Zhonghua Gas Holdings had debt of CN¥49.5m at the end of December 2024, a reduction from CN¥94.1m over a year. But on the other hand it also has CN¥69.2m in cash, leading to a CN¥19.6m net cash position.

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A Look At Zhonghua Gas Holdings' Liabilities

The latest balance sheet data shows that Zhonghua Gas Holdings had liabilities of CN¥231.8m due within a year, and liabilities of CN¥1.65m falling due after that. On the other hand, it had cash of CN¥69.2m and CN¥48.2m worth of receivables due within a year. So it has liabilities totalling CN¥116.1m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Zhonghua Gas Holdings is worth CN¥409.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Zhonghua Gas 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 Zhonghua Gas 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.

Over 12 months, Zhonghua Gas Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥89m, which is a fall of 52%. To be frank that doesn't bode well.

So How Risky Is Zhonghua Gas Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Zhonghua Gas Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥130m of cash and made a loss of CN¥49m. Given it only has net cash of CN¥19.6m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. To that end, you should learn about the 3 warning signs we've spotted with Zhonghua Gas Holdings (including 2 which make us uncomfortable) .

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.