Is Dr. Peng Telecom & Media Group (SHSE:600804) Using Debt In A Risky Way?

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 Dr. Peng Telecom & Media Group Co., Ltd. (SHSE:600804) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Dr. Peng Telecom & Media Group

How Much Debt Does Dr. Peng Telecom & Media Group Carry?

You can click the graphic below for the historical numbers, but it shows that Dr. Peng Telecom & Media Group had CN¥2.19b of debt in September 2023, down from CN¥2.46b, one year before. However, it also had CN¥309.8m in cash, and so its net debt is CN¥1.88b.

How Healthy Is Dr. Peng Telecom & Media Group's Balance Sheet?

According to the last reported balance sheet, Dr. Peng Telecom & Media Group had liabilities of CN¥3.25b due within 12 months, and liabilities of CN¥3.04b due beyond 12 months. On the other hand, it had cash of CN¥309.8m and CN¥918.8m worth of receivables due within a year. So it has liabilities totalling CN¥5.06b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥5.12b, so it does suggest shareholders should keep an eye on Dr. Peng Telecom & Media Group's use of debt. 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 ultimately the future profitability of the business will decide if Dr. Peng Telecom & Media Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Dr. Peng Telecom & Media Group wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to CN¥3.6b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Dr. Peng Telecom & Media Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥108m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥638m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. To that end, you should be aware of the 1 warning sign we've spotted with Dr. Peng Telecom & Media Group .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.