Huanxi Media Group (HKG:1003) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Huanxi Media Group Limited (HKG:1003) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

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

What Is Huanxi Media Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Huanxi Media Group had HK$18.5m of debt in June 2022, down from HK$116.5m, one year before. However, its balance sheet shows it holds HK$47.6m in cash, so it actually has HK$29.0m net cash.

How Strong Is Huanxi Media Group's Balance Sheet?

The latest balance sheet data shows that Huanxi Media Group had liabilities of HK$682.4m due within a year, and liabilities of HK$38.2m falling due after that. On the other hand, it had cash of HK$47.6m and HK$224.7m worth of receivables due within a year. So its liabilities total HK$448.3m more than the combination of its cash and short-term receivables.

Given Huanxi Media Group has a market capitalization of HK$3.55b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Huanxi Media Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Huanxi Media Group'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 Huanxi Media Group had a loss before interest and tax, and actually shrunk its revenue by 93%, to HK$21m. To be frank that doesn't bode well.

So How Risky Is Huanxi Media Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Huanxi Media Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$78m and booked a HK$232m accounting loss. With only HK$29.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Huanxi Media Group (1 is concerning) 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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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.