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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Television Broadcasts Limited (HKG:511) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Television Broadcasts

What Is Television Broadcasts's Debt?

As you can see below, at the end of June 2023, Television Broadcasts had HK$2.29b of debt, up from HK$2.18b a year ago. Click the image for more detail. However, because it has a cash reserve of HK$960.2m, its net debt is less, at about HK$1.33b.

How Strong Is Television Broadcasts' Balance Sheet?

The latest balance sheet data shows that Television Broadcasts had liabilities of HK$1.89b due within a year, and liabilities of HK$1.65b falling due after that. On the other hand, it had cash of HK$960.2m and HK$1.24b worth of receivables due within a year. So its liabilities total HK$1.34b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of HK$1.79b, so it does suggest shareholders should keep an eye on Television Broadcasts' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Television Broadcasts 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.

In the last year Television Broadcasts had a loss before interest and tax, and actually shrunk its revenue by 4.2%, to HK$3.3b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Television Broadcasts produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping HK$835m. 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. 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 HK$271m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Television Broadcasts , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.