Is Television Broadcasts (HKG:511) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Television Broadcasts Limited (HKG:511) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Television Broadcasts

What Is Television Broadcasts's Net Debt?

As you can see below, Television Broadcasts had HK$1.81b of debt at June 2020, down from HK$2.56b a year prior. However, because it has a cash reserve of HK$1.26b, its net debt is less, at about HK$554.0m.

How Healthy Is Television Broadcasts's Balance Sheet?

We can see from the most recent balance sheet that Television Broadcasts had liabilities of HK$789.8m falling due within a year, and liabilities of HK$1.89b due beyond that. Offsetting this, it had HK$1.26b in cash and HK$1.67b in receivables that were due within 12 months. So it can boast HK$255.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Television Broadcasts could probably pay off its debt with ease, as its balance sheet is far from stretched. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Television Broadcasts'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.

Over 12 months, Television Broadcasts made a loss at the EBIT level, and saw its revenue drop to HK$2.9b, which is a fall of 31%. That makes us nervous, to say the least.

Caveat Emptor

While Television Broadcasts's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable HK$670m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Television Broadcasts (1 makes us a bit uncomfortable) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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