Health Check: How Prudently Does Television Broadcasts (HKG:511) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Television Broadcasts Limited (HKG:511) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Television Broadcasts

How Much Debt Does Television Broadcasts Carry?

As you can see below, at the end of June 2023, Television Broadcasts had HK$2.29b of debt, up from HK$2.18b a year ago. Click the image for more detail. On the flip side, it has HK$960.2m in cash leading to net debt of about HK$1.33b.

How Strong Is Television Broadcasts' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Television Broadcasts had liabilities of HK$1.89b due within 12 months and liabilities of HK$1.65b due beyond that. Offsetting these obligations, it had cash of HK$960.2m as well as receivables valued at HK$1.24b due within 12 months. So its liabilities total HK$1.34b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of HK$1.53b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Television Broadcasts can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Television Broadcasts had a loss before interest and tax, and actually shrunk its revenue by 4.2%, to HK$3.3b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Television Broadcasts produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$831m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$478m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Television Broadcasts you should know about.

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.