Guangdong Guangzhou Daily Media (SZSE:002181) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Guangdong Guangzhou Daily Media Co., Ltd. (SZSE:002181) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Guangdong Guangzhou Daily Media

How Much Debt Does Guangdong Guangzhou Daily Media Carry?

As you can see below, Guangdong Guangzhou Daily Media had CN¥441.3m of debt at June 2024, down from CN¥544.5m a year prior. But it also has CN¥750.9m in cash to offset that, meaning it has CN¥309.6m net cash.

How Healthy Is Guangdong Guangzhou Daily Media's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Guangdong Guangzhou Daily Media had liabilities of CN¥509.1m due within 12 months and liabilities of CN¥557.6m due beyond that. Offsetting these obligations, it had cash of CN¥750.9m as well as receivables valued at CN¥148.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥166.9m.

Of course, Guangdong Guangzhou Daily Media has a market capitalization of CN¥4.23b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Guangdong Guangzhou Daily Media also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Guangdong Guangzhou Daily Media will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Guangdong Guangzhou Daily Media wasn't profitable at an EBIT level, but managed to grow its revenue by 3.6%, to CN¥577m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Guangdong Guangzhou Daily Media?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Guangdong Guangzhou Daily Media lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥82m and booked a CN¥43m accounting loss. With only CN¥309.6m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Case in point: We've spotted 2 warning signs for Guangdong Guangzhou Daily Media 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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