Is Xinhua News Media Holdings (HKG:309) Using Debt Sensibly?

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.' 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. We can see that Xinhua News Media Holdings Limited (HKG:309) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Xinhua News Media Holdings

What Is Xinhua News Media Holdings's Net Debt?

As you can see below, at the end of September 2021, Xinhua News Media Holdings had HK$12.6m of debt, up from HK$9.10m a year ago. Click the image for more detail. But it also has HK$92.1m in cash to offset that, meaning it has HK$79.5m net cash.

A Look At Xinhua News Media Holdings' Liabilities

We can see from the most recent balance sheet that Xinhua News Media Holdings had liabilities of HK$67.1m falling due within a year, and liabilities of HK$8.06m due beyond that. Offsetting these obligations, it had cash of HK$92.1m as well as receivables valued at HK$42.9m due within 12 months. So it can boast HK$59.8m 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. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Xinhua News Media Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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$231m, which is a fall of 20%. 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$40m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Xinhua News Media Holdings has 1 warning sign we think you should be aware of.

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.

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.

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