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

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.' 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 the real question is whether this debt is making the company risky.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Phoenix Media Investment (Holdings)

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

The image below, which you can click on for greater detail, shows that Phoenix Media Investment (Holdings) had debt of HK$185.1m at the end of December 2022, a reduction from HK$531.6m over a year. But it also has HK$2.61b in cash to offset that, meaning it has HK$2.43b net cash.

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

We can see from the most recent balance sheet that Phoenix Media Investment (Holdings) had liabilities of HK$1.94b falling due within a year, and liabilities of HK$845.9m due beyond that. Offsetting these obligations, it had cash of HK$2.61b as well as receivables valued at HK$1.13b due within 12 months. So it actually has HK$953.8m more liquid assets than total liabilities.

This surplus strongly suggests that Phoenix Media Investment (Holdings) has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Phoenix Media Investment (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Phoenix Media Investment (Holdings)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Phoenix Media Investment (Holdings) had a loss before interest and tax, and actually shrunk its revenue by 4.9%, to HK$3.0b. 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$169m. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Phoenix Media Investment (Holdings) has 1 warning sign we think you should be aware of.

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.