Is Phoenix Media Investment (Holdings) (HKG:2008) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Phoenix Media Investment (Holdings) Limited (HKG:2008) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

See our latest analysis for Phoenix Media Investment (Holdings)

How Much Debt Does Phoenix Media Investment (Holdings) Carry?

As you can see below, Phoenix Media Investment (Holdings) had HK$188.6m of debt at June 2023, down from HK$514.4m a year prior. But it also has HK$2.57b in cash to offset that, meaning it has HK$2.38b net cash.

A Look At Phoenix Media Investment (Holdings)'s Liabilities

We can see from the most recent balance sheet that Phoenix Media Investment (Holdings) had liabilities of HK$1.93b falling due within a year, and liabilities of HK$793.7m due beyond that. Offsetting this, it had HK$2.57b in cash and HK$1.01b in receivables that were due within 12 months. So it can boast HK$861.4m more liquid assets than total liabilities.

This luscious liquidity implies that Phoenix Media Investment (Holdings)'s balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Phoenix Media Investment (Holdings) has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Phoenix Media Investment (Holdings) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Phoenix Media Investment (Holdings) made a loss at the EBIT level, and saw its revenue drop to HK$2.6b, which is a fall of 19%. That's not what we would hope to see.

So How Risky Is Phoenix Media Investment (Holdings)?

While Phoenix Media Investment (Holdings) lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$214m. 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. There's no doubt the next few years will be crucial to how the business matures. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Phoenix Media Investment (Holdings) .

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.