David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Huayi Brothers Media Corporation (SZSE:300027) makes use of debt. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Huayi Brothers Media

What Is Huayi Brothers Media's Debt?

The image below, which you can click on for greater detail, shows that Huayi Brothers Media had debt of CN¥1.49b at the end of September 2023, a reduction from CN¥1.56b over a year. However, it does have CN¥278.0m in cash offsetting this, leading to net debt of about CN¥1.22b.

How Strong Is Huayi Brothers Media's Balance Sheet?

The latest balance sheet data shows that Huayi Brothers Media had liabilities of CN¥2.71b due within a year, and liabilities of CN¥975.4m falling due after that. On the other hand, it had cash of CN¥278.0m and CN¥280.4m worth of receivables due within a year. So it has liabilities totalling CN¥3.13b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Huayi Brothers Media is worth CN¥7.46b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Huayi Brothers Media had a loss before interest and tax, and actually shrunk its revenue by 37%, to CN¥513m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Huayi Brothers Media's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥464m. 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. We would feel better if it turned its trailing twelve month loss of CN¥1.0b into a profit. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.