Does Asia Television Holdings (HKG:707) 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.' 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 note that Asia Television Holdings Limited (HKG:707) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Asia Television Holdings

How Much Debt Does Asia Television Holdings Carry?

As you can see below, Asia Television Holdings had CN¥389.9m of debt at December 2020, down from CN¥507.4m a year prior. On the flip side, it has CN¥195.1m in cash leading to net debt of about CN¥194.9m.

How Strong Is Asia Television Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Asia Television Holdings had liabilities of CN¥644.8m due within 12 months and liabilities of CN¥142.5m due beyond that. Offsetting these obligations, it had cash of CN¥195.1m as well as receivables valued at CN¥81.0m due within 12 months. So it has liabilities totalling CN¥511.2m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥317.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Asia Television Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Asia Television 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 Asia Television Holdings's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Asia Television Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥150m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CN¥173m. In the meantime, we consider the stock to be 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. Case in point: We've spotted 4 warning signs for Asia Television Holdings you should be aware of, and 1 of them doesn't sit too well with us.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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