Television Broadcasts (HKG:511) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Television Broadcasts Limited (HKG:511) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Television Broadcasts

How Much Debt Does Television Broadcasts Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Television Broadcasts had HK$3.76b of debt, an increase on HK$1.81b, over one year. On the flip side, it has HK$3.18b in cash leading to net debt of about HK$586.3m.

How Strong Is Television Broadcasts' Balance Sheet?

According to the last reported balance sheet, Television Broadcasts had liabilities of HK$2.45b due within 12 months, and liabilities of HK$2.00b due beyond 12 months. Offsetting this, it had HK$3.18b in cash and HK$1.53b in receivables that were due within 12 months. So it can boast HK$250.3m 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 you can't view debt in total isolation; since Television Broadcasts will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Television Broadcasts had a loss before interest and tax, and actually shrunk its revenue by 5.6%, to HK$2.7b. That's not what we would hope to see.

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$478m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Television Broadcasts (including 2 which don't sit too well with us) .

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.