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 JiShi Media Co., Ltd. (SHSE:601929) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does JiShi Media Carry?
The image below, which you can click on for greater detail, shows that at September 2023 JiShi Media had debt of CN¥5.70b, up from CN¥4.73b in one year. However, because it has a cash reserve of CN¥897.8m, its net debt is less, at about CN¥4.80b.
How Healthy Is JiShi Media's Balance Sheet?
According to the last reported balance sheet, JiShi Media had liabilities of CN¥3.83b due within 12 months, and liabilities of CN¥4.64b due beyond 12 months. Offsetting these obligations, it had cash of CN¥897.8m as well as receivables valued at CN¥567.2m due within 12 months. So its liabilities total CN¥7.01b more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's CN¥5.51b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is JiShi Media'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 JiShi Media had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥1.8b. We would much prefer see growth.
Caveat Emptor
Not only did JiShi Media's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥495m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CN¥108m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. Case in point: We've spotted 4 warning signs for JiShi Media you should be aware of, and 2 of them are potentially serious.
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.