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

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 Ruicheng (China) Media Group Limited (HKG:1640) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ruicheng (China) Media Group

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

The image below, which you can click on for greater detail, shows that at June 2023 Ruicheng (China) Media Group had debt of CN¥172.7m, up from CN¥120.2m in one year. And it doesn't have much cash, so its net debt is about the same.

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

The latest balance sheet data shows that Ruicheng (China) Media Group had liabilities of CN¥306.5m due within a year, and liabilities of CN¥30.0m falling due after that. On the other hand, it had cash of CN¥822.0k and CN¥531.0m worth of receivables due within a year. So it can boast CN¥195.2m more liquid assets than total liabilities.

This surplus liquidity suggests that Ruicheng (China) Media Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ruicheng (China) 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 Ruicheng (China) Media Group had a loss before interest and tax, and actually shrunk its revenue by 2.9%, to CN¥407m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Ruicheng (China) Media Group produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥23m. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. To that end, you should learn about the 4 warning signs we've spotted with Ruicheng (China) Media Group (including 3 which are significant) .

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.