Is New Silkroad Culturaltainment (HKG:472) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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

What Is New Silkroad Culturaltainment's Net Debt?

You can click the graphic below for the historical numbers, but it shows that New Silkroad Culturaltainment had HK$55.6m of debt in June 2024, down from HK$69.8m, one year before. However, its balance sheet shows it holds HK$175.5m in cash, so it actually has HK$119.9m net cash.

A Look At New Silkroad Culturaltainment's Liabilities

According to the last reported balance sheet, New Silkroad Culturaltainment had liabilities of HK$407.6m due within 12 months, and liabilities of HK$75.0m due beyond 12 months. Offsetting this, it had HK$175.5m in cash and HK$289.4m in receivables that were due within 12 months. So its liabilities total HK$17.8m more than the combination of its cash and short-term receivables.

Since publicly traded New Silkroad Culturaltainment shares are worth a total of HK$465.1m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, New Silkroad Culturaltainment also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is New Silkroad Culturaltainment's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year New Silkroad Culturaltainment wasn't profitable at an EBIT level, but managed to grow its revenue by 142%, to HK$617m. So there's no doubt that shareholders are cheering for growth

So How Risky Is New Silkroad Culturaltainment?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months New Silkroad Culturaltainment lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$8.6m of cash and made a loss of HK$115m. But the saving grace is the HK$119.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. The good news for shareholders is that New Silkroad Culturaltainment has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for New Silkroad Culturaltainment (of which 1 is significant!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.