Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Xinhua News Media Holdings Limited (HKG:309) uses debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies 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.
See our latest analysis for Xinhua News Media Holdings
How much debt does Xinhua News Media Holdings have?
You can click on the graph below for historical numbers, but it shows that in September 2021, Xinhua News Media Holdings had HK$12.6 million in debt, up from HK$9.10 million. HK dollars, over one year. However, his balance sheet shows that he holds HK$96.4 million in cash, so he actually has net cash of HK$83.8 million.
How strong is Xinhua News Media Holdings’ balance sheet?
The latest balance sheet data shows that Xinhua News Media Holdings had liabilities of HK$67.1 million due within one year, and liabilities of HK$8.06 million falling due thereafter. As compensation for these obligations, it had cash of HK$96.4 million as well as receivables valued at HK$52.2 million and payable within 12 months. It can therefore boast that it has HK$73.4 million more in cash than total Passives.
This excess cash is a great indication that Xinhua News Media Holdings’ balance sheet is almost as strong as Fort Knox’s. From this perspective, lenders should feel as secure as the beloved of a black belt karate master. In short, Xinhua News Media Holdings has clean cash, so it’s fair to say that it doesn’t have heavy debt! The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since Xinhua News Media Holdings will need revenue to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Year-on-year, Xinhua News Media Holdings posted an EBIT loss and saw its revenue drop to HK$262 million, down 8.8%. We would much rather see growth.
So how risky is Xinhua News Media Holdings?
While Xinhua News Media Holdings lost money in earnings before interest and tax (EBIT), it actually generated positive free cash flow of HK$13 million. So, although it is loss-making, it does not seem to have too much short-term balance sheet risk, given net cash. There is no doubt that the next few years will be crucial for the maturation of the company. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Xinhua News Media Holdings you should know.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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