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 can see that Hubei Radio & Television Information Network Co., Ltd. (SZSE:000665) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Hubei Radio & Television Information Network
What Is Hubei Radio & Television Information Network's Debt?
The image below, which you can click on for greater detail, shows that at June 2023 Hubei Radio & Television Information Network had debt of CN¥3.45b, up from CN¥2.80b in one year. However, it does have CN¥615.1m in cash offsetting this, leading to net debt of about CN¥2.84b.
How Healthy Is Hubei Radio & Television Information Network's Balance Sheet?
The latest balance sheet data shows that Hubei Radio & Television Information Network had liabilities of CN¥3.38b due within a year, and liabilities of CN¥2.09b falling due after that. On the other hand, it had cash of CN¥615.1m and CN¥1.17b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.67b.
This is a mountain of leverage relative to its market capitalization of CN¥5.47b. 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 it is Hubei Radio & Television Information Network's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Hubei Radio & Television Information Network reported revenue of CN¥2.2b, which is a gain of 5.3%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months Hubei Radio & Television Information Network produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥559m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥740m of cash over the last year. So in short it's a really risky stock. 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 example, we've discovered 2 warning signs for Hubei Radio & Television Information Network that you should be aware of before investing here.
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.
