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. We note that Alibaba Pictures Group Limited (HKG:1060) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Alibaba Pictures Group's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Alibaba Pictures Group had CN¥717.3m of debt, an increase on CN¥46.3m, over one year. However, it does have CN¥4.36b in cash offsetting this, leading to net cash of CN¥3.64b.
A Look At Alibaba Pictures Group's Liabilities
The latest balance sheet data shows that Alibaba Pictures Group had liabilities of CN¥900.4m due within a year, and liabilities of CN¥765.2m falling due after that. Offsetting these obligations, it had cash of CN¥4.36b as well as receivables valued at CN¥1.55b due within 12 months. So it can boast CN¥4.24b more liquid assets than total liabilities.
This surplus suggests that Alibaba Pictures Group is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Alibaba Pictures Group boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Alibaba Pictures Group 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 Alibaba Pictures Group wasn't profitable at an EBIT level, but managed to grow its revenue by15%, to CN¥3.0b. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Alibaba Pictures Group?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Alibaba Pictures Group had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through CN¥1.4b of cash and made a loss of CN¥254m. But the saving grace is the CN¥3.64b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Alibaba Pictures Group insider transactions.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.