Does iQIYI (NASDAQ:IQ) Have A Healthy Balance Sheet?

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, iQIYI, Inc. (NASDAQ:IQ) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for iQIYI

How Much Debt Does iQIYI Carry?

The image below, which you can click on for greater detail, shows that iQIYI had debt of CN¥18.9b at the end of September 2022, a reduction from CN¥22.1b over a year. On the flip side, it has CN¥5.03b in cash leading to net debt of about CN¥13.9b.

A Look At iQIYI's Liabilities

We can see from the most recent balance sheet that iQIYI had liabilities of CN¥29.1b falling due within a year, and liabilities of CN¥8.29b due beyond that. On the other hand, it had cash of CN¥5.03b and CN¥2.75b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥29.7b.

When you consider that this deficiency exceeds the company's CN¥21.5b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if iQIYI can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year iQIYI had a loss before interest and tax, and actually shrunk its revenue by 6.0%, to CN¥29b. That's not what we would hope to see.

Caveat Emptor

Importantly, iQIYI had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥107m. 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 had negative free cash flow of CN¥2.5b over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for iQIYI that you should be aware of before investing here.

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.

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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.