Health Check: How Prudently Does China Partytime Culture Holdings (HKG:1532) Use Debt?

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

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for China Partytime Culture Holdings

How Much Debt Does China Partytime Culture Holdings Carry?

As you can see below, China Partytime Culture Holdings had CN¥18.0m of debt at June 2024, down from CN¥77.1m a year prior. However, it does have CN¥37.2m in cash offsetting this, leading to net cash of CN¥19.2m.

How Strong Is China Partytime Culture Holdings' Balance Sheet?

The latest balance sheet data shows that China Partytime Culture Holdings had liabilities of CN¥64.8m due within a year, and liabilities of CN¥409.0k falling due after that. Offsetting these obligations, it had cash of CN¥37.2m as well as receivables valued at CN¥98.7m due within 12 months. So it can boast CN¥70.8m 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. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, China Partytime Culture Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year China Partytime Culture Holdings's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is China Partytime Culture Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that China Partytime Culture Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥39m and booked a CN¥20m accounting loss. With only CN¥19.2m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for China Partytime Culture Holdings (1 is potentially serious!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.