Is the Zicom group (ASX:ZGL) weighed down by its debt?

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David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Zicom Group Limited (ASX:ZGL) uses debt. But does this debt worry shareholders?

Why is debt risky?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.

Discover our latest analysis for Zicom Group

What is the debt of the Zicom group?

The image below, which you can click on for more details, shows that in June 2022, the Zicom Group had a debt of 29.1 million Singapore dollars, compared to 19.5 million Singapore dollars in one year . However, he has S$14.1 million to offset this, resulting in a net debt of around S$15.1 million.

ASX: ZGL Debt to Equity History September 7, 2022

How solid is the Zicom group’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Zicom Group had liabilities of S$58.9 million due within 12 months and liabilities of S$15.5 million due beyond. In return, he had S$14.1 million in cash and S$26.7 million in debt due within 12 months. Thus, its liabilities total S$33.6 million more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the 13.3 million Singaporean company, like a colossus towering above mere mortals. We would therefore be watching his balance sheet closely, no doubt. After all, Zicom Group would likely need a major recapitalization if it were to pay its creditors today. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; as Zicom Group will need revenue to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.

Last year, the Zicom Group’s turnover was rather stable and it achieved a negative EBIT. While that’s not too bad, we’d rather see growth.

Caveat Emptor

It is important to note that the Zicom Group recorded a loss of earnings before interest and taxes (EBIT) during the last year. Its EBIT loss was S$7.3 million. Considering the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will change course. Still, we wouldn’t bet on it considering he’s vaporized S$6.4m in the last twelve months and doesn’t have much cash. We therefore consider this to be a high-risk action and would not be at all surprised if the company were to ask shareholders for money before long. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 3 warning signs for Zicom Group (2 are a bit of a concern) that you should be aware of.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

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

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