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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Ruicheng (China) Media Group Limited (HKG:1640) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ruicheng (China) Media Group

How Much Debt Does Ruicheng (China) Media Group Carry?

As you can see below, at the end of December 2023, Ruicheng (China) Media Group had CN¥163.7m of debt, up from CN¥117.2m a year ago. Click the image for more detail. On the flip side, it has CN¥17.9m in cash leading to net debt of about CN¥145.8m.

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

We can see from the most recent balance sheet that Ruicheng (China) Media Group had liabilities of CN¥362.9m falling due within a year, and liabilities of CN¥30.0m due beyond that. Offsetting these obligations, it had cash of CN¥17.9m as well as receivables valued at CN¥346.7m due within 12 months. So its liabilities total CN¥28.3m more than the combination of its cash and short-term receivables.

Of course, Ruicheng (China) Media Group has a market capitalization of CN¥215.1m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ruicheng (China) Media Group will need earnings to service that debt. 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.

Over 12 months, Ruicheng (China) Media Group made a loss at the EBIT level, and saw its revenue drop to CN¥379m, which is a fall of 8.2%. 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. Indeed, it lost a very considerable CN¥28m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥37m of cash over the last year. So in short it's a really risky stock. 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. To that end, you should learn about the 4 warning signs we've spotted with Ruicheng (China) Media Group (including 2 which are a bit concerning) .

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.

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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.