Does China Partytime Culture Holdings (HKG:1532) Have A Healthy Balance Sheet?

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 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. As with many other companies China Partytime Culture Holdings Limited (HKG:1532) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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How Much Debt Does China Partytime Culture Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2022 China Partytime Culture Holdings had debt of CN¥118.1m, up from CN¥81.5m in one year. However, it also had CN¥99.5m in cash, and so its net debt is CN¥18.6m.

A Look At China Partytime Culture Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that China Partytime Culture Holdings had liabilities of CN¥175.0m due within 12 months and liabilities of CN¥6.33m due beyond that. On the other hand, it had cash of CN¥99.5m and CN¥127.0m worth of receivables due within a year. So it actually has CN¥45.2m more liquid assets than total liabilities.

This excess liquidity is a great indication that China Partytime Culture 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China Partytime Culture 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, China Partytime Culture Holdings reported revenue of CN¥302m, which is a gain of 26%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though China Partytime Culture Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable CN¥31m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. 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. We've identified 4 warning signs with China Partytime Culture Holdings (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.