China Digital Video Holdings (HKG:8280) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, China Digital Video Holdings Limited (HKG:8280) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for China Digital Video Holdings

What Is China Digital Video Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that China Digital Video Holdings had CN¥135.3m of debt in June 2022, down from CN¥182.5m, one year before. But it also has CN¥178.0m in cash to offset that, meaning it has CN¥42.6m net cash.

A Look At China Digital Video Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that China Digital Video Holdings had liabilities of CN¥340.0m due within 12 months and liabilities of CN¥36.2m due beyond that. Offsetting this, it had CN¥178.0m in cash and CN¥156.4m in receivables that were due within 12 months. So its liabilities total CN¥41.8m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥42.5m, so it does suggest shareholders should keep an eye on China Digital Video Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, China Digital Video Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Digital Video Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year China Digital Video Holdings had a loss before interest and tax, and actually shrunk its revenue by 31%, to CN¥225m. That makes us nervous, to say the least.

So How Risky Is China Digital Video Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year China Digital Video Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥17m and booked a CN¥104m accounting loss. With only CN¥42.6m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Be aware that China Digital Video Holdings is showing 3 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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

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.