New Silkroad Culturaltainment (HKG:472) Has Debt But No Earnings; Should You Worry?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies New Silkroad Culturaltainment Limited (HKG:472) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for New Silkroad Culturaltainment

How Much Debt Does New Silkroad Culturaltainment Carry?

You can click the graphic below for the historical numbers, but it shows that New Silkroad Culturaltainment had HK$69.8m of debt in June 2023, down from HK$74.4m, one year before. But on the other hand it also has HK$242.3m in cash, leading to a HK$172.5m net cash position.

How Strong Is New Silkroad Culturaltainment's Balance Sheet?

According to the last reported balance sheet, New Silkroad Culturaltainment had liabilities of HK$442.8m due within 12 months, and liabilities of HK$118.8m due beyond 12 months. Offsetting this, it had HK$242.3m in cash and HK$99.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$219.7m.

This deficit isn't so bad because New Silkroad Culturaltainment is worth HK$577.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, New Silkroad Culturaltainment boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since New Silkroad Culturaltainment 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.

Over 12 months, New Silkroad Culturaltainment made a loss at the EBIT level, and saw its revenue drop to HK$255m, which is a fall of 91%. That makes us nervous, to say the least.

So How Risky Is New Silkroad Culturaltainment?

While New Silkroad Culturaltainment lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$60m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for New Silkroad Culturaltainment (1 is significant!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.