New Silkroad Culturaltainment (HKG:472) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 New Silkroad Culturaltainment Limited (HKG:472) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out the opportunities and risks within the HK Beverage industry.

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$74.4m at the end of June 2022, a reduction from HK$2.15b over a year. But it also has HK$541.1m in cash to offset that, meaning it has HK$466.7m net cash.

How Strong Is New Silkroad Culturaltainment's Balance Sheet?

The latest balance sheet data shows that New Silkroad Culturaltainment had liabilities of HK$201.2m due within a year, and liabilities of HK$135.6m falling due after that. Offsetting these obligations, it had cash of HK$541.1m as well as receivables valued at HK$3.56m due within 12 months. So it can boast HK$207.9m more liquid assets than total liabilities.

This surplus liquidity suggests that New Silkroad Culturaltainment's 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. Succinctly put, New Silkroad Culturaltainment boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, New Silkroad Culturaltainment turned things around in the last 12 months, delivering and EBIT of HK$404m. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, New Silkroad Culturaltainment actually produced more free cash flow than EBIT over the last year. 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$466.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of HK$2.4b, being 595% of its EBIT. So is New Silkroad Culturaltainment's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with New Silkroad Culturaltainment .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.