We Think Hubei Radio & Television Information Network (SZSE:000665) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. 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 A Problem?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 Hubei Radio & Television Information Network had CN¥3.28b of debt in September 2024, down from CN¥3.48b, one year before. However, it does have CN¥152.4m in cash offsetting this, leading to net debt of about CN¥3.13b.

A Look At Hubei Radio & Television Information Network's Liabilities

Zooming in on the latest balance sheet data, we can see that Hubei Radio & Television Information Network had liabilities of CN¥5.37b due within 12 months and liabilities of CN¥551.7m due beyond 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¥5.45b. 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.

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%. That's not what we would hope to see.

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. Indeed, it lost a very considerable CN¥600m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥265m of cash over the last year. So to be blunt we think it is 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. Be aware that Hubei Radio & Television Information Network is showing 3 warning signs in our investment analysis , and 2 of those make us uncomfortable...

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.