Is Xinhua News Media Holdings (HKG:309) A Risky Investment?

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.' 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 Xinhua News Media Holdings Limited (HKG:309) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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

See our latest analysis for Xinhua News Media Holdings

What Is Xinhua News Media Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Xinhua News Media Holdings had HK$12.6m of debt, an increase on HK$9.10m, over one year. However, its balance sheet shows it holds HK$96.4m in cash, so it actually has HK$83.8m net cash.

How Strong Is Xinhua News Media Holdings' Balance Sheet?

The latest balance sheet data shows that Xinhua News Media Holdings had liabilities of HK$67.1m due within a year, and liabilities of HK$8.06m falling due after that. Offsetting these obligations, it had cash of HK$96.4m as well as receivables valued at HK$52.2m due within 12 months. So it can boast HK$73.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Xinhua News Media Holdings' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Xinhua News Media Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Xinhua News Media Holdings 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.

Over 12 months, Xinhua News Media Holdings made a loss at the EBIT level, and saw its revenue drop to HK$262m, which is a fall of 8.8%. We would much prefer see growth.

So How Risky Is Xinhua News Media Holdings?

While Xinhua News Media Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$13m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. There's no doubt the next few years will be crucial to how the business matures. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Xinhua News Media Holdings you should know about.

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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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.