Does Huawen Media Group (SZSE:000793) Have A Healthy Balance Sheet?

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. Importantly, Huawen Media Group (SZSE:000793) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Huawen Media Group

How Much Debt Does Huawen Media Group Carry?

The image below, which you can click on for greater detail, shows that Huawen Media Group had debt of CN¥1.49b at the end of September 2024, a reduction from CN¥2.04b over a year. However, it also had CN¥233.5m in cash, and so its net debt is CN¥1.25b.

A Look At Huawen Media Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Huawen Media Group had liabilities of CN¥1.08b due within 12 months and liabilities of CN¥913.2m due beyond that. Offsetting this, it had CN¥233.5m in cash and CN¥641.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.12b.

Since publicly traded Huawen Media Group shares are worth a total of CN¥6.37b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Huawen Media Group'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, Huawen Media Group made a loss at the EBIT level, and saw its revenue drop to CN¥387m, which is a fall of 14%. That's not what we would hope to see.

Caveat Emptor

While Huawen Media Group'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 CN¥67m 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. Another cause for caution is that is bled CN¥2.9m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Huawen Media Group has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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