Does Ruicheng (China) Media Group (HKG:1640) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Ruicheng (China) Media Group Limited (HKG:1640) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Ruicheng (China) Media Group

What Is Ruicheng (China) Media Group's Debt?

As you can see below, at the end of June 2022, Ruicheng (China) Media Group had CN¥120.2m of debt, up from CN¥114.4m a year ago. Click the image for more detail. However, it does have CN¥15.2m in cash offsetting this, leading to net debt of about CN¥105.0m.

How Strong Is Ruicheng (China) Media Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ruicheng (China) Media Group had liabilities of CN¥388.6m due within 12 months and no liabilities due beyond that. Offsetting this, it had CN¥15.2m in cash and CN¥342.4m in receivables that were due within 12 months. So it has liabilities totalling CN¥31.0m more than its cash and near-term receivables, combined.

Given Ruicheng (China) Media Group has a market capitalization of CN¥179.0m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ruicheng (China) Media Group 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 Ruicheng (China) Media Group had a loss before interest and tax, and actually shrunk its revenue by 12%, to CN¥419m. We would much prefer see growth.

Caveat Emptor

Not only did Ruicheng (China) Media Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥2.7m at the EBIT level. 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. Another cause for caution is that is bled CN¥15m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Ruicheng (China) Media Group (3 are a bit concerning) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.