Is Litian Pictures Holdings (HKG:9958) Weighed On By Its Debt Load?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Litian Pictures Holdings

How Much Debt Does Litian Pictures Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Litian Pictures Holdings had debt of CN¥205.0m, up from CN¥183.8m in one year. Net debt is about the same, since the it doesn't have much cash.

How Healthy 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¥731.0m due within 12 months and liabilities of CN¥1.47m due beyond that. Offsetting this, it had CN¥3.19m in cash and CN¥211.0m in receivables that were due within 12 months. So its liabilities total CN¥518.4m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥301.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Litian Pictures Holdings would probably need a major re-capitalization if its creditors were to demand repayment. 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.

In the last year Litian Pictures Holdings had a loss before interest and tax, and actually shrunk its revenue by 50%, to CN¥83m. That makes us nervous, to say the least.

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¥245m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CN¥77m in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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. To that end, you should learn about the 3 warning signs we've spotted with Litian Pictures Holdings (including 2 which are concerning) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.