We Think Ruicheng (China) Media Group (HKG:1640) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, 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 thing to do when considering how much debt a business uses is to look at 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 2022 Ruicheng (China) Media Group had debt of CN¥120.2m, up from CN¥114.4m in one year. On the flip side, it has CN¥15.2m in cash leading to net debt of about CN¥105.0m.

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

According to the balance sheet data, Ruicheng (China) Media Group had liabilities of CN¥388.6m due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of CN¥15.2m as well as receivables valued at CN¥342.4m due within 12 months. So its liabilities total CN¥31.0m more than the combination of its cash and short-term receivables.

Given Ruicheng (China) Media Group has a market capitalization of CN¥159.0m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

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. That's not what we would hope to see.

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. 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. For example, we would not want to see a repeat of last year's loss of CN¥8.7m. 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. For example Ruicheng (China) Media Group has 4 warning signs (and 3 which don't sit too well with us) we think you should know about.

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.