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 Hubei Radio & Television Information Network Co., Ltd. (SZSE:000665) makes use of debt. But should shareholders be worried about its use of debt?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Hubei Radio & Television Information Network
How Much Debt Does Hubei Radio & Television Information Network Carry?
The image below, which you can click on for greater detail, shows that at September 2023 Hubei Radio & Television Information Network had debt of CN¥3.48b, up from CN¥2.93b in one year. On the flip side, it has CN¥426.5m in cash leading to net debt of about CN¥3.05b.
How Strong Is Hubei Radio & Television Information Network's Balance Sheet?
We can see from the most recent balance sheet that Hubei Radio & Television Information Network had liabilities of CN¥3.42b falling due within a year, and liabilities of CN¥2.04b due beyond that. Offsetting these obligations, it had cash of CN¥426.5m as well as receivables valued at CN¥1.35b due within 12 months. So it has liabilities totalling CN¥3.68b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of CN¥5.07b, so it does suggest shareholders should keep an eye on Hubei Radio & Television Information Network's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Hubei Radio & Television Information Network'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.
In the last year Hubei Radio & Television Information Network wasn't profitable at an EBIT level, but managed to grow its revenue by 2.7%, to CN¥2.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months Hubei Radio & Television Information Network produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥548m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥710m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Hubei Radio & Television Information Network that you should be aware of.
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.
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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.