Is China Parenting Network Holdings (HKG:1736) Using Debt Sensibly?

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. We can see that China Parenting Network Holdings Limited (HKG:1736) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for China Parenting Network Holdings

How Much Debt Does China Parenting Network Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2021 China Parenting Network Holdings had debt of CN¥44.3m, up from CN¥19.0m in one year. However, it does have CN¥44.4m in cash offsetting this, leading to net cash of CN¥115.0k.

How Strong Is China Parenting Network Holdings' Balance Sheet?

According to the last reported balance sheet, China Parenting Network Holdings had liabilities of CN¥66.5m due within 12 months, and liabilities of CN¥3.05m due beyond 12 months. Offsetting these obligations, it had cash of CN¥44.4m as well as receivables valued at CN¥29.9m due within 12 months. So it can boast CN¥4.74m more liquid assets than total liabilities.

This surplus suggests that China Parenting Network Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, China Parenting Network Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 China Parenting Network Holdings 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, China Parenting Network Holdings reported revenue of CN¥102m, which is a gain of 35%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is China Parenting Network Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year China Parenting Network Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥22m and booked a CN¥77m accounting loss. Given it only has net cash of CN¥115.0k, the company may need to raise more capital if it doesn't reach break-even soon. China Parenting Network Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Be aware that China Parenting Network Holdings is showing 3 warning signs in our investment analysis , and 2 of those are a bit unpleasant...

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.