Is Litian Pictures Holdings (HKG:9958) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Litian Pictures Holdings Limited (HKG:9958) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Litian Pictures Holdings

What Is Litian Pictures Holdings's Debt?

The image below, which you can click on for greater detail, shows that Litian Pictures Holdings had debt of CN¥160.5m at the end of December 2023, a reduction from CN¥212.7m over a year. However, it does have CN¥4.50m in cash offsetting this, leading to net debt of about CN¥156.0m.

A Look At Litian Pictures Holdings' Liabilities

According to the last reported balance sheet, Litian Pictures Holdings had liabilities of CN¥685.6m due within 12 months, and liabilities of CN¥2.97m due beyond 12 months. Offsetting these obligations, it had cash of CN¥4.50m as well as receivables valued at CN¥126.8m due within 12 months. So it has liabilities totalling CN¥557.2m more than its cash and near-term receivables, combined.

Litian Pictures Holdings has a market capitalization of CN¥1.05b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Litian Pictures Holdings'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, Litian Pictures Holdings reported revenue of CN¥113m, which is a gain of 391%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, Litian Pictures Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥124m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥155m. So to be blunt we do think it is risky. 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 example Litian Pictures Holdings has 3 warning signs (and 2 which are a bit unpleasant) we think 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.

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.