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

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.' 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. As with many other companies Hubei Radio & Television Information Network Co., Ltd. (SZSE:000665) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Hubei Radio & Television Information Network

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

As you can see below, Hubei Radio & Television Information Network had CN¥3.48b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of CN¥101.0m, its net debt is less, at about CN¥3.38b.

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¥4.91b due within 12 months, and liabilities of CN¥720.9m due beyond 12 months. Offsetting this, it had CN¥101.0m in cash and CN¥1.40b in receivables that were due within 12 months. So it has liabilities totalling CN¥4.12b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥4.20b. 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 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¥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. Indeed, it lost a very considerable CN¥604m 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¥240m 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. To that end, you should be aware of the 2 warning signs we've spotted with Hubei Radio & Television Information Network .

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.