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. As with many other companies Huayi Brothers Media Corporation (SZSE:300027) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Huayi Brothers Media's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Huayi Brothers Media had CN¥989.4m of debt in March 2024, down from CN¥1.58b, one year before. However, it also had CN¥276.8m in cash, and so its net debt is CN¥712.6m.

A Look At Huayi Brothers Media's Liabilities

The latest balance sheet data shows that Huayi Brothers Media had liabilities of CN¥2.18b due within a year, and liabilities of CN¥969.2m falling due after that. Offsetting this, it had CN¥276.8m in cash and CN¥388.4m in receivables that were due within 12 months. So it has liabilities totalling CN¥2.49b more than its cash and near-term receivables, combined.

Huayi Brothers Media has a market capitalization of CN¥5.44b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Huayi Brothers Media's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Huayi Brothers Media wasn't profitable at an EBIT level, but managed to grow its revenue by 4.9%, to CN¥528m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Huayi Brothers Media had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥70m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of CN¥547m. So to be blunt we do think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Huayi Brothers Media's profit, revenue, and operating cashflow have changed over the last few years.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.