Would Guizhou BC&TV Information NetworkLTD (SHSE:600996) Be Better Off With Less Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Guizhou BC&TV Information Network CO.,LTD (SHSE:600996) makes use of debt. 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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Guizhou BC&TV Information NetworkLTD

What Is Guizhou BC&TV Information NetworkLTD's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Guizhou BC&TV Information NetworkLTD had CN¥7.28b of debt, an increase on CN¥5.91b, over one year. On the flip side, it has CN¥431.0m in cash leading to net debt of about CN¥6.84b.

How Healthy Is Guizhou BC&TV Information NetworkLTD's Balance Sheet?

We can see from the most recent balance sheet that Guizhou BC&TV Information NetworkLTD had liabilities of CN¥10.2b falling due within a year, and liabilities of CN¥2.74b due beyond that. On the other hand, it had cash of CN¥431.0m and CN¥5.01b worth of receivables due within a year. So it has liabilities totalling CN¥7.48b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥9.50b, so it does suggest shareholders should keep an eye on Guizhou BC&TV Information NetworkLTD's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Guizhou BC&TV Information NetworkLTD 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.

Over 12 months, Guizhou BC&TV Information NetworkLTD reported revenue of CN¥3.6b, which is a gain of 22%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Guizhou BC&TV Information NetworkLTD still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥400m. 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¥954m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For instance, we've identified 2 warning signs for Guizhou BC&TV Information NetworkLTD that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.