Is Litian Pictures Holdings (HKG:9958) Using Debt In A Risky Way?

Warren Buffett famously said, '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.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Litian Pictures Holdings

What Is Litian Pictures Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Litian Pictures Holdings had CN¥153.1m of debt in June 2024, down from CN¥205.0m, one year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Litian Pictures Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Litian Pictures Holdings had liabilities of CN¥684.0m due within 12 months and liabilities of CN¥1.74m due beyond that. Offsetting these obligations, it had cash of CN¥2.44m as well as receivables valued at CN¥104.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥578.6m.

This deficit casts a shadow over the CN¥65.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Litian Pictures Holdings would likely require a major re-capitalisation if it had to pay its creditors today. 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.

In the last year Litian Pictures Holdings had a loss before interest and tax, and actually shrunk its revenue by 44%, to CN¥46m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Litian Pictures Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥129m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥159m in the last year. So we think buying this stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Litian Pictures Holdings that 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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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.