These 4 Measures Indicate That China Partytime Culture Holdings (HKG:1532) Is Using Debt Safely

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that China Partytime Culture Holdings Limited (HKG:1532) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for China Partytime Culture Holdings

What Is China Partytime Culture Holdings's Net Debt?

As you can see below, China Partytime Culture Holdings had CN¥77.1m of debt at June 2023, down from CN¥118.1m a year prior. But on the other hand it also has CN¥119.6m in cash, leading to a CN¥42.5m net cash position.

A Look At China Partytime Culture Holdings' Liabilities

The latest balance sheet data shows that China Partytime Culture Holdings had liabilities of CN¥126.0m due within a year, and liabilities of CN¥6.04m falling due after that. Offsetting this, it had CN¥119.6m in cash and CN¥91.4m in receivables that were due within 12 months. So it can boast CN¥79.0m more liquid assets than total liabilities.

This surplus liquidity suggests that China Partytime Culture Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that China Partytime Culture Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, China Partytime Culture Holdings made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥4.0m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is China Partytime Culture 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While China Partytime Culture Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, China Partytime Culture Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Partytime Culture Holdings has CN¥42.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥41m, being 1,024% of its EBIT. So we don't think China Partytime Culture Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with China Partytime Culture Holdings , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.