The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Bona Film Group Co., Ltd. (SZSE:001330) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Bona Film Group Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Bona Film Group had CN¥4.13b of debt, an increase on CN¥3.58b, over one year. On the flip side, it has CN¥2.08b in cash leading to net debt of about CN¥2.05b.
A Look At Bona Film Group's Liabilities
Zooming in on the latest balance sheet data, we can see that Bona Film Group had liabilities of CN¥5.60b due within 12 months and liabilities of CN¥4.13b due beyond that. On the other hand, it had cash of CN¥2.08b and CN¥991.1m worth of receivables due within a year. So it has liabilities totalling CN¥6.67b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of CN¥7.78b, so it does suggest shareholders should keep an eye on Bona Film Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Bona Film Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Bona Film Group had a loss before interest and tax, and actually shrunk its revenue by 56%, to CN¥1.6b. That makes us nervous, to say the least.
Caveat Emptor
While Bona Film Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥400m. 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. For example, we would not want to see a repeat of last year's loss of CN¥394m. So to be blunt we do think it is risky. For riskier companies like Bona Film Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.