David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Guizhou BC&TV Information Network CO.,LTD (SHSE:600996) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Guizhou BC&TV Information NetworkLTD
How Much Debt Does Guizhou BC&TV Information NetworkLTD Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Guizhou BC&TV Information NetworkLTD had CN¥7.28b of debt, an increase on CN¥5.91b, over one year. However, it does have CN¥431.0m in cash offsetting this, leading to net debt of about CN¥6.84b.
How Strong Is Guizhou BC&TV Information NetworkLTD's Balance Sheet?
We can see from the most recent balance sheet that Guizhou BC&TV Information NetworkLTD had liabilities of CN¥10.2b falling due within a year, and liabilities of CN¥2.74b due beyond that. Offsetting this, it had CN¥431.0m in cash and CN¥5.01b in receivables that were due within 12 months. So it has liabilities totalling CN¥7.48b more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of CN¥9.48b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Guizhou BC&TV Information NetworkLTD will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Guizhou BC&TV Information NetworkLTD wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to CN¥3.6b. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Even though Guizhou BC&TV Information NetworkLTD managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at CN¥400m. 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. Another cause for caution is that is bled CN¥954m in negative free cash flow over the last twelve months. 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. Be aware that Guizhou BC&TV Information NetworkLTD is showing 2 warning signs in our investment analysis , you should know about...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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