China Digital Video Holdings (HKG:8280) has debt but no income; Should you be worried?
Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it may be obvious that you need to consider debt when thinking about the risk of a given stock, because too much debt can sink a business. Above all, China Digital Video Holdings Limited (HKG:8280) is in debt. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check out our latest analysis for China Digital Video Holdings
What is the net debt of China Digital Video Holdings?
You can click on the chart below for historical numbers, but it shows China Digital Video Holdings had 135.3 million yen in debt in June 2022, up from 182.5 million yen a year earlier. But he also has 178.0 million yen in cash to make up for that, meaning he has a net cash of 42.6 million yen.
A look at the liabilities of China Digital Video Holdings
Zooming in on the latest balance sheet data, we can see that China Digital Video Holdings had liabilities of 340.0 million Canadian yen due within 12 months and liabilities of 36.2 million domestic yen due beyond. In return, he had 178.0 million Canadian yen in cash and 156.4 million domestic yen in receivables due within 12 months. Thus, its liabilities total 41.8 million Canadian yen more than the combination of its cash and short-term receivables.
This deficit is considerable compared to its market capitalization of 42.5 million Canadian yen, so he suggests that shareholders monitor the use of debt by China Digital Video Holdings. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly. Despite its notable liabilities, China Digital Video Holdings has a net cash position, so it’s fair to say that it doesn’t have a lot of debt! When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since China Digital Video Holdings will need revenue to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Last year, China Digital Video Holdings posted a loss before interest and taxes and actually cut its revenue by 31%, to 225 million yen. It makes us nervous, to say the least.
So how risky is China Digital Video Holdings?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And last year, China Digital Video Holdings posted a loss in earnings before interest and taxes (EBIT), if truth be told. And during the same period, it recorded a negative free cash outflow of 17 million Canadian yen and recorded a book loss of 104 million domestic yen. With just 42.6 million Canadian yen on the balance sheet, it looks like it will soon have to raise capital again. In summary, we are a little skeptical of this one, as it looks quite risky in the absence of free cash flow. 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. Be aware that China Digital Video Holdings displays 3 warning signs in our investment analysis you should know…
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.