Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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.
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Dr. Peng Telecom & Media Group's Debt?
As you can see below, Dr. Peng Telecom & Media Group had CN¥2.19b of debt at September 2023, down from CN¥2.46b a year prior. However, because it has a cash reserve of CN¥309.8m, its net debt is less, at about CN¥1.88b.
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¥3.25b due within a year, and liabilities of CN¥3.04b falling due after that. Offsetting this, it had CN¥309.8m in cash and CN¥918.8m in receivables that were due within 12 months. So its liabilities total CN¥5.06b more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's CN¥5.06b 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dr. Peng Telecom & Media Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Dr. Peng Telecom & Media Group reported revenue of CN¥3.6b, which is a gain of 11%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, Dr. Peng Telecom & Media Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥108m. 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¥638m in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Dr. Peng Telecom & Media Group 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.