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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Hong Kong Television Network Limited (HKG:1137) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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. 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 Hong Kong Television Network
How Much Debt Does Hong Kong Television Network Carry?
As you can see below, Hong Kong Television Network had HK$153.1m of debt at June 2019, down from HK$274.1m a year prior. However, because it has a cash reserve of HK$92.0m, its net debt is less, at about HK$61.1m.
How Strong Is Hong Kong Television Network's Balance Sheet?
We can see from the most recent balance sheet that Hong Kong Television Network had liabilities of HK$624.4m falling due within a year, and liabilities of HK$168.2m due beyond that. Offsetting this, it had HK$92.0m in cash and HK$91.7m in receivables that were due within 12 months. So it has liabilities totalling HK$608.9m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Hong Kong Television Network is worth HK$2.38b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Hong Kong Television Network 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 Hong Kong Television Network wasn't profitable at an EBIT level, but managed to grow its revenue by69%, to HK$1.1b. Shareholders probably have their fingers crossed that it can grow its way to profits.