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. We note that Dr. Peng Telecom & Media Group Co., Ltd. (SHSE:600804) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
See our latest analysis for Dr. Peng Telecom & Media Group
How Much Debt Does Dr. Peng Telecom & Media Group Carry?
As you can see below, Dr. Peng Telecom & Media Group had CN¥2.16b of debt at June 2023, down from CN¥2.58b a year prior. However, because it has a cash reserve of CN¥555.0m, its net debt is less, at about CN¥1.61b.
How Strong Is Dr. Peng Telecom & Media Group's Balance Sheet?
The latest balance sheet data shows that Dr. Peng Telecom & Media Group had liabilities of CN¥3.21b due within a year, and liabilities of CN¥2.79b falling due after that. Offsetting these obligations, it had cash of CN¥555.0m as well as receivables valued at CN¥857.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.59b.
This is a mountain of leverage relative to its market capitalization of CN¥5.95b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Dr. Peng Telecom & Media Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Dr. Peng Telecom & Media Group wasn't profitable at an EBIT level, but managed to grow its revenue by 6.8%, to CN¥3.8b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Dr. Peng Telecom & Media Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥147m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥513m of cash over the last year. So in short it's a really risky stock. 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. For example, we've discovered 1 warning sign for Dr. Peng Telecom & Media Group 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.