Is Ruicheng (China) Media Group (HKG:1640) Using Too Much 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. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Ruicheng (China) Media Group

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

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Ruicheng (China) Media Group had CN¥172.7m of debt, an increase on CN¥120.2m, over one year. And it doesn't have much cash, so its net debt is about the same.

A Look At Ruicheng (China) Media Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Ruicheng (China) Media Group had liabilities of CN¥306.5m due within 12 months and liabilities of CN¥30.0m due beyond that. Offsetting these obligations, it had cash of CN¥822.0k as well as receivables valued at CN¥363.6m due within 12 months. So it actually has CN¥27.9m more liquid assets than total liabilities.

It's good to see that Ruicheng (China) Media Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. There's no doubt that we learn most about debt from the balance sheet. But it is Ruicheng (China) Media Group's earnings that will influence how the balance sheet holds up in the future. 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¥407m, which is a fall of 2.9%. 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. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Ruicheng (China) Media Group has 4 warning signs (and 2 which are significant) we think you should know about.

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.

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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.