Is Phoenix Media Investment (Holdings) (HKG:2008) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Phoenix Media Investment (Holdings)

What Is Phoenix Media Investment (Holdings)'s Debt?

The chart below, which you can click on for greater detail, shows that Phoenix Media Investment (Holdings) had HK$514.4m in debt in June 2022; about the same as the year before. But it also has HK$2.66b in cash to offset that, meaning it has HK$2.15b net cash.

How Strong Is Phoenix Media Investment (Holdings)'s Balance Sheet?

According to the last reported balance sheet, Phoenix Media Investment (Holdings) had liabilities of HK$2.52b due within 12 months, and liabilities of HK$801.1m due beyond 12 months. Offsetting these obligations, it had cash of HK$2.66b as well as receivables valued at HK$1.62b due within 12 months. So it can boast HK$963.8m more liquid assets than total liabilities.

This surplus liquidity suggests that Phoenix Media Investment (Holdings)'s balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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 it is Phoenix Media Investment (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, Phoenix Media Investment (Holdings) reported revenue of HK$3.3b, which is a gain of 3.8%, 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 Phoenix Media Investment (Holdings)?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Phoenix Media Investment (Holdings) had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$261m and booked a HK$542m accounting loss. With only HK$2.15b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Case in point: We've spotted 1 warning sign for Phoenix Media Investment (Holdings) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.