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. Importantly, Hubei Radio & Television Information Network Co., Ltd. (SZSE:000665) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Hubei Radio & Television Information Network Carry?

The chart below, which you can click on for greater detail, shows that Hubei Radio & Television Information Network had CN¥3.48b in debt in June 2024; about the same as the year before. However, it also had CN¥101.0m in cash, and so its net debt is CN¥3.38b.

How Strong Is Hubei Radio & Television Information Network's Balance Sheet?

We can see from the most recent balance sheet that Hubei Radio & Television Information Network had liabilities of CN¥4.91b falling due within a year, and liabilities of CN¥720.9m due beyond that. Offsetting these obligations, it had cash of CN¥101.0m as well as receivables valued at CN¥1.40b due within 12 months. So its liabilities total CN¥4.12b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥4.37b, so it does suggest shareholders should keep an eye on Hubei Radio & Television Information Network's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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 made a loss at the EBIT level, and saw its revenue drop to CN¥2.0b, which is a fall of 8.6%. That's not what we would hope to see.

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¥604m. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥240m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Hubei Radio & Television Information Network that you should be aware of before investing here.

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.