Health Check: How Prudently Does Starrise Media Holdings (HKG:1616) Use Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Starrise Media Holdings Limited (HKG:1616) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Starrise Media Holdings

What Is Starrise Media Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Starrise Media Holdings had debt of CN¥82.6m at the end of June 2021, a reduction from CN¥448.9m over a year. But it also has CN¥164.7m in cash to offset that, meaning it has CN¥82.1m net cash.

How Healthy Is Starrise Media Holdings' Balance Sheet?

The latest balance sheet data shows that Starrise Media Holdings had liabilities of CN¥255.8m due within a year, and liabilities of CN¥17.9m falling due after that. Offsetting this, it had CN¥164.7m in cash and CN¥388.4m in receivables that were due within 12 months. So it can boast CN¥279.4m more liquid assets than total liabilities.

This surplus strongly suggests that Starrise Media Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Starrise Media Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Starrise Media Holdings 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.

In the last year Starrise Media Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 46%, to CN¥138m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Starrise Media Holdings?

While Starrise Media Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥49m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Given it also grew revenue by 46% over the last year, we think there's a good chance the company is on track. That growth could mean this is one stock well worth watching. 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. Case in point: We've spotted 4 warning signs for Starrise Media Holdings you should be aware of, and 1 of them can't be ignored.

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.

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.

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