Hubei Radio & Television Information Network (SZSE:000665) Is Making Moderate Use Of 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 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. Importantly, Hubei Radio & Television Information Network Co., Ltd. (SZSE:000665) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hubei Radio & Television Information Network

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

The image below, which you can click on for greater detail, shows that at September 2023 Hubei Radio & Television Information Network had debt of CN¥3.48b, up from CN¥2.93b in one year. On the flip side, it has CN¥426.5m in cash leading to net debt of about CN¥3.05b.

How Healthy 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¥3.42b falling due within a year, and liabilities of CN¥2.04b due beyond that. Offsetting this, it had CN¥426.5m in cash and CN¥1.35b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.68b.

This is a mountain of leverage relative to its market capitalization of CN¥5.14b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Hubei Radio & Television Information Network wasn't profitable at an EBIT level, but managed to grow its revenue by 2.7%, to CN¥2.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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¥548m. 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. However, it doesn't help that it burned through CN¥710m of cash over the last year. 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 instance, we've identified 2 warning signs for Hubei Radio & Television Information Network that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.