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

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Xinhua News Media Holdings Limited (HKG:309) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Xinhua News Media Holdings

What Is Xinhua News Media Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Xinhua News Media Holdings had HK$15.2m of debt, an increase on HK$12.6m, over one year. But on the other hand it also has HK$88.0m in cash, leading to a HK$72.8m net cash position.

How Strong Is Xinhua News Media Holdings' Balance Sheet?

The latest balance sheet data shows that Xinhua News Media Holdings had liabilities of HK$66.2m due within a year, and liabilities of HK$5.50m falling due after that. Offsetting this, it had HK$88.0m in cash and HK$56.3m in receivables that were due within 12 months. So it actually has HK$72.7m more liquid assets than total liabilities.

This surplus liquidity suggests that Xinhua News Media Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Xinhua News Media Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Xinhua News Media Holdings reported revenue of HK$269m, which is a gain of 2.9%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Xinhua News Media Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Xinhua News Media Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$15m of cash and made a loss of HK$21m. Given it only has net cash of HK$72.8m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. 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 3 warning signs for Xinhua News Media Holdings (of which 2 can't be ignored!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.