Is Asiaray Media Group (HKG:1993) Using Too Much 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.' 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. We can see that Asiaray Media Group Limited (HKG:1993) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Asiaray Media Group

What Is Asiaray Media Group's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Asiaray Media Group had debt of HK$336.5m, up from HK$270.4m in one year. However, it does have HK$410.1m in cash offsetting this, leading to net cash of HK$73.6m.

A Look At Asiaray Media Group's Liabilities

The latest balance sheet data shows that Asiaray Media Group had liabilities of HK$1.93b due within a year, and liabilities of HK$3.06b falling due after that. On the other hand, it had cash of HK$410.1m and HK$874.9m worth of receivables due within a year. So it has liabilities totalling HK$3.71b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$445.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Asiaray Media Group would probably need a major re-capitalization if its creditors were to demand repayment. Asiaray Media Group boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Asiaray 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.

Over 12 months, Asiaray Media Group reported revenue of HK$2.3b, which is a gain of 20%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Asiaray Media Group?

Although Asiaray Media Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$967m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Asiaray Media Group (including 1 which is potentially serious) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.