Is Hubei Radio & Television Information Network (SZSE:000665) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Hubei Radio & Television Information Network Co., Ltd. (SZSE:000665) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hubei Radio & Television Information Network had CN¥3.65b of debt, an increase on CN¥3.23b, over one year. However, because it has a cash reserve of CN¥240.5m, its net debt is less, at about CN¥3.41b.

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

According to the last reported balance sheet, Hubei Radio & Television Information Network had liabilities of CN¥4.88b due within 12 months, and liabilities of CN¥763.7m due beyond 12 months. Offsetting this, it had CN¥240.5m in cash and CN¥1.24b in receivables that were due within 12 months. So its liabilities total CN¥4.16b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥4.44b. 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 7.5%. 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. Indeed, it lost a very considerable CN¥603m at the EBIT level. 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. However, it doesn't help that it burned through CN¥595m of cash over the last year. 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 example - Hubei Radio & Television Information Network has 2 warning signs we think you should be aware of.

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.