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. We note that Xinhua News Media Holdings Limited (HKG:309) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

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 2024 Xinhua News Media Holdings had HK$13.1m of debt, an increase on HK$8.99m, over one year. But it also has HK$58.2m in cash to offset that, meaning it has HK$45.1m net cash.

A Look At Xinhua News Media Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Xinhua News Media Holdings had liabilities of HK$75.4m due within 12 months and liabilities of HK$196.0k due beyond that. Offsetting this, it had HK$58.2m in cash and HK$85.5m in receivables that were due within 12 months. So it actually has HK$68.1m 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. Having regard to this fact, we think its balance sheet is as strong as an ox. 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 it is Xinhua News Media Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Xinhua News Media Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to HK$349m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Xinhua News Media Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Xinhua News Media Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$15m of cash and made a loss of HK$8.7m. But the saving grace is the HK$45.1m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. We've identified 2 warning signs with Xinhua News Media Holdings , and understanding them should be part of your investment process.

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.