Is Culturecom Holdings (HKG:343) 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.' 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 Culturecom Holdings Limited (HKG:343) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Culturecom Holdings

What Is Culturecom Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Culturecom Holdings had HK$15.9m of debt, an increase on none, over one year. However, its balance sheet shows it holds HK$118.1m in cash, so it actually has HK$102.2m net cash.

How Strong Is Culturecom Holdings's Balance Sheet?

According to the last reported balance sheet, Culturecom Holdings had liabilities of HK$50.5m due within 12 months, and liabilities of HK$4.22m due beyond 12 months. On the other hand, it had cash of HK$118.1m and HK$52.3m worth of receivables due within a year. So it can boast HK$115.7m more liquid assets than total liabilities.

This surplus liquidity suggests that Culturecom 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 is as strong as beautiful a rare rhino. Simply put, the fact that Culturecom Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Culturecom 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 Culturecom Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 298%, to HK$199m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Culturecom Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Culturecom Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$32m of cash and made a loss of HK$63m. But the saving grace is the HK$102.2m on the balance sheet. That means it could keep spending at its current rate for more than two years. Importantly, Culturecom Holdings's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Culturecom Holdings 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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