Television Broadcasts (HKG:511) Is Making Moderate Use Of 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.' 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. As with many other companies Television Broadcasts Limited (HKG:511) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Television Broadcasts

What Is Television Broadcasts's Net Debt?

As you can see below, at the end of December 2020, Television Broadcasts had HK$3.75b of debt, up from HK$2.21b a year ago. Click the image for more detail. However, because it has a cash reserve of HK$3.42b, its net debt is less, at about HK$328.1m.

How Healthy Is Television Broadcasts' Balance Sheet?

We can see from the most recent balance sheet that Television Broadcasts had liabilities of HK$2.53b falling due within a year, and liabilities of HK$2.00b due beyond that. Offsetting these obligations, it had cash of HK$3.42b as well as receivables valued at HK$1.65b due within 12 months. So it actually has HK$539.7m more liquid assets than total liabilities.

This surplus suggests that Television Broadcasts is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Television Broadcasts's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Television Broadcasts made a loss at the EBIT level, and saw its revenue drop to HK$2.7b, which is a fall of 25%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Television Broadcasts's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost HK$318m 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. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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