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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, China Parenting Network Holdings Limited (HKG:1736) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for China Parenting Network Holdings

How Much Debt Does China Parenting Network Holdings Carry?

As you can see below, China Parenting Network Holdings had CN¥36.9m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥5.38m in cash offsetting this, leading to net debt of about CN¥31.6m.

How Strong Is China Parenting Network Holdings' Balance Sheet?

The latest balance sheet data shows that China Parenting Network Holdings had liabilities of CN¥66.2m due within a year, and liabilities of CN¥181.0k falling due after that. Offsetting these obligations, it had cash of CN¥5.38m as well as receivables valued at CN¥8.54m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥52.5m.

This deficit casts a shadow over the CN¥32.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, China Parenting Network Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is China Parenting Network Holdings'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, China Parenting Network Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥75m, which is a fall of 12%. That's not what we would hope to see.

Caveat Emptor

Not only did China Parenting Network Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥20m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CN¥2.2m in negative free cash flow over the last year. That means it's on the risky side of things. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for China Parenting Network Holdings (of which 2 are significant!) 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.