Zibuyu Group (HKG:2420) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Zibuyu Group Limited (HKG:2420) does use debt in its business. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

What Is Zibuyu Group's Debt?

As you can see below, at the end of June 2025, Zibuyu Group had CN¥168.7m of debt, up from CN¥157.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥348.0m in cash, leading to a CN¥179.3m net cash position.

How Strong Is Zibuyu Group's Balance Sheet?

The latest balance sheet data shows that Zibuyu Group had liabilities of CN¥594.7m due within a year, and liabilities of CN¥15.9m falling due after that. On the other hand, it had cash of CN¥348.0m and CN¥238.7m worth of receivables due within a year. So its liabilities total CN¥23.9m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Zibuyu Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥1.48b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Zibuyu Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Zibuyu Group

It was also good to see that despite losing money on the EBIT line last year, Zibuyu Group turned things around in the last 12 months, delivering and EBIT of CN¥153m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Zibuyu Group 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Zibuyu Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent year, Zibuyu Group recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Zibuyu Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥179.3m. So we don't have any problem with Zibuyu Group's use of debt. 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 2 warning signs for Zibuyu Group (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.