Would Huanxi Media Group (HKG:1003) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 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. 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. 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.

See our latest analysis for Huanxi Media Group

How Much Debt Does Huanxi Media Group Carry?

You can click the graphic below for the historical numbers, but it shows that Huanxi Media Group had HK$108.4m of debt in December 2022, down from HK$115.4m, one year before. On the flip side, it has HK$93.9m in cash leading to net debt of about HK$14.5m.

A Look At Huanxi Media Group's Liabilities

The latest balance sheet data shows that Huanxi Media Group had liabilities of HK$852.6m due within a year, and liabilities of HK$29.3m falling due after that. On the other hand, it had cash of HK$93.9m and HK$255.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$532.6m.

Since publicly traded Huanxi Media Group shares are worth a total of HK$4.20b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Huanxi Media Group has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Huanxi Media Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Huanxi Media Group had a loss before interest and tax, and actually shrunk its revenue by 91%, to HK$14m. To be frank that doesn't bode well.

Caveat Emptor

While Huanxi Media Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at HK$228m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of HK$222m into a profit. So we do think this stock is quite risky. 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. Be aware that Huanxi Media Group is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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.

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.