Is New Silkroad Culturaltainment (HKG:472) A Risky Investment?

Simply Wall St
May 11, 2022
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, New Silkroad Culturaltainment Limited (HKG:472) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for New Silkroad Culturaltainment

How Much Debt Does New Silkroad Culturaltainment Carry?

The image below, which you can click on for greater detail, shows that New Silkroad Culturaltainment had debt of HK$173.8m at the end of December 2021, a reduction from HK$1.88b over a year. However, it does have HK$627.1m in cash offsetting this, leading to net cash of HK$453.3m.

SEHK:472 Debt to Equity History May 11th 2022

How Healthy Is New Silkroad Culturaltainment's Balance Sheet?

The latest balance sheet data shows that New Silkroad Culturaltainment had liabilities of HK$485.9m due within a year, and liabilities of HK$139.3m falling due after that. On the other hand, it had cash of HK$627.1m and HK$12.1m worth of receivables due within a year. So it can boast HK$13.9m more liquid assets than total liabilities.

This surplus suggests that New Silkroad Culturaltainment has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that New Silkroad Culturaltainment has more cash than debt is arguably a good indication that it can manage its debt safely.

Although New Silkroad Culturaltainment made a loss at the EBIT level, last year, it was also good to see that it generated HK$394m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since New Silkroad Culturaltainment 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While New Silkroad Culturaltainment 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, New Silkroad Culturaltainment 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 we empathize with investors who find debt concerning, you should keep in mind that New Silkroad Culturaltainment has net cash of HK$453.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of HK$2.1b, being 526% of its EBIT. So is New Silkroad Culturaltainment's debt a risk? It doesn't seem so to us. 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. For example - New Silkroad Culturaltainment has 3 warning signs we think you should be aware of.

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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