Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Guangdong Guangzhou Daily Media Co., Ltd. (SZSE:002181) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. By replacing dilution, though, debt can be an extremely good tool for businesses 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.
View our latest analysis for Guangdong Guangzhou Daily Media
How Much Debt Does Guangdong Guangzhou Daily Media Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Guangdong Guangzhou Daily Media had CN¥553.8m of debt, an increase on CN¥518.5m, over one year. However, it does have CN¥282.4m in cash offsetting this, leading to net debt of about CN¥271.4m.
A Look At Guangdong Guangzhou Daily Media's Liabilities
We can see from the most recent balance sheet that Guangdong Guangzhou Daily Media had liabilities of CN¥382.1m falling due within a year, and liabilities of CN¥668.6m due beyond that. Offsetting this, it had CN¥282.4m in cash and CN¥133.7m in receivables that were due within 12 months. So its liabilities total CN¥634.6m more than the combination of its cash and short-term receivables.
Since publicly traded Guangdong Guangzhou Daily Media shares are worth a total of CN¥5.60b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Guangdong Guangzhou Daily Media's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Guangdong Guangzhou Daily Media wasn't profitable at an EBIT level, but managed to grow its revenue by 5.1%, to CN¥560m. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, Guangdong Guangzhou Daily Media had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥63m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥414m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Guangdong Guangzhou Daily Media has 3 warning signs (and 2 which make us uncomfortable) we think you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.