China Partytime Culture Holdings (HKG:1532) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that China Partytime Culture Holdings Limited (HKG:1532) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for China Partytime Culture Holdings

What Is China Partytime Culture Holdings's Debt?

The image below, which you can click on for greater detail, shows that China Partytime Culture Holdings had debt of CN¥71.9m at the end of December 2022, a reduction from CN¥89.3m over a year. However, it does have CN¥50.7m in cash offsetting this, leading to net debt of about CN¥21.2m.

How Healthy Is China Partytime Culture Holdings' Balance Sheet?

The latest balance sheet data shows that China Partytime Culture Holdings had liabilities of CN¥92.8m due within a year, and liabilities of CN¥6.24m falling due after that. On the other hand, it had cash of CN¥50.7m and CN¥68.5m worth of receivables due within a year. So it actually has CN¥20.2m more liquid assets than total liabilities.

This short term liquidity is a sign that China Partytime Culture Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Partytime Culture 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.

In the last year China Partytime Culture Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to CN¥301m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, China Partytime Culture Holdings still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥6.6m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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. Be aware that China Partytime Culture Holdings is showing 4 warning signs in our investment analysis , and 2 of those are potentially serious...

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.

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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.