Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 TVZone Media Co., Ltd. (SHSE:603721) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 TVZone Media Carry?

The image below, which you can click on for greater detail, shows that TVZone Media had debt of CN¥183.3m at the end of June 2024, a reduction from CN¥211.5m over a year. But it also has CN¥214.3m in cash to offset that, meaning it has CN¥31.0m net cash.

How Strong Is TVZone Media's Balance Sheet?

The latest balance sheet data shows that TVZone Media had liabilities of CN¥102.2m due within a year, and liabilities of CN¥192.6m falling due after that. Offsetting this, it had CN¥214.3m in cash and CN¥134.6m in receivables that were due within 12 months. So it can boast CN¥54.1m more liquid assets than total liabilities.

This state of affairs indicates that TVZone Media's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥4.12b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, TVZone Media boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since TVZone Media 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.

Over 12 months, TVZone Media reported revenue of CN¥263m, which is a gain of 18%, 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.

So How Risky Is TVZone Media?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year TVZone Media had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥688k of cash and made a loss of CN¥10m. With only CN¥31.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with TVZone Media , and understanding them should be part of your investment process.

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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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.