We Think China Parenting Network Holdings (HKG:1736) 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 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 the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for China Parenting Network Holdings

What Is China Parenting Network Holdings's Debt?

The image below, which you can click on for greater detail, shows that China Parenting Network Holdings had debt of CN¥32.2m at the end of December 2022, a reduction from CN¥48.9m over a year. However, because it has a cash reserve of CN¥23.5m, its net debt is less, at about CN¥8.69m.

How Healthy Is China Parenting Network Holdings' Balance Sheet?

According to the last reported balance sheet, China Parenting Network Holdings had liabilities of CN¥65.0m due within 12 months, and liabilities of CN¥693.0k due beyond 12 months. On the other hand, it had cash of CN¥23.5m and CN¥20.0m worth of receivables due within a year. So its liabilities total CN¥22.1m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because China Parenting Network Holdings is worth CN¥37.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year China Parenting Network Holdings had a loss before interest and tax, and actually shrunk its revenue by 9.4%, to CN¥85m. That's not what we would hope to see.

Caveat Emptor

Importantly, China Parenting Network Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥18m. 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥42m into a profit. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. 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 , 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.