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.' 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 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?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Hubei Radio & Television Information Network's Net Debt?

As you can see below, Hubei Radio & Television Information Network had CN¥3.28b of debt at September 2024, down from CN¥3.48b a year prior. However, it also had CN¥152.4m in cash, and so its net debt is CN¥3.13b.

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¥5.37b due within a year, and liabilities of CN¥551.7m falling due after that. Offsetting these obligations, it had cash of CN¥152.4m as well as receivables valued at CN¥1.51b due within 12 months. So it has liabilities totalling CN¥4.26b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥4.70b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hubei Radio & Television Information Network will need earnings to service that debt. 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¥1.9b, which is a fall of 13%. We would much prefer see growth.

Caveat Emptor

While Hubei Radio & Television Information Network's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥600m. 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. Another cause for caution is that is bled CN¥265m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Hubei Radio & Television Information Network .

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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