Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Guangzhou Jinyi Media Corporation (SZSE:002905) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Guangzhou Jinyi Media
What Is Guangzhou Jinyi Media's Debt?
The chart below, which you can click on for greater detail, shows that Guangzhou Jinyi Media had CN¥418.0m in debt in June 2023; about the same as the year before. However, it does have CN¥498.4m in cash offsetting this, leading to net cash of CN¥80.4m.
A Look At Guangzhou Jinyi Media's Liabilities
We can see from the most recent balance sheet that Guangzhou Jinyi Media had liabilities of CN¥1.12b falling due within a year, and liabilities of CN¥2.94b due beyond that. Offsetting these obligations, it had cash of CN¥498.4m as well as receivables valued at CN¥95.0m due within 12 months. So it has liabilities totalling CN¥3.46b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of CN¥3.85b, so it does suggest shareholders should keep an eye on Guangzhou Jinyi Media's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Guangzhou Jinyi Media also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Guangzhou Jinyi Media will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Guangzhou Jinyi Media had a loss before interest and tax, and actually shrunk its revenue by 3.4%, to CN¥1.0b. We would much prefer see growth.
So How Risky Is Guangzhou Jinyi Media?
While Guangzhou Jinyi Media lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥299m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Case in point: We've spotted 2 warning signs for Guangzhou Jinyi Media you should be aware of, and 1 of them shouldn't be ignored.
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.