Is Litian Pictures Holdings (HKG:9958) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Litian Pictures Holdings Limited (HKG:9958) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See 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 at June 2022 Litian Pictures Holdings had debt of CN¥183.8m, up from CN¥81.9m in one year. However, it does have CN¥57.7m in cash offsetting this, leading to net debt of about CN¥126.1m.

A Look At Litian Pictures Holdings' Liabilities

We can see from the most recent balance sheet that Litian Pictures Holdings had liabilities of CN¥561.2m falling due within a year, and liabilities of CN¥13.4m due beyond that. Offsetting these obligations, it had cash of CN¥57.7m as well as receivables valued at CN¥300.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥216.7m.

This is a mountain of leverage relative to its market capitalization of CN¥306.3m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Litian Pictures 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.

Over 12 months, Litian Pictures Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥167m, which is a fall of 53%. To be frank that doesn't bode well.

Caveat Emptor

While Litian Pictures Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥112m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥137m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Litian Pictures Holdings (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.