Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Phoenix Media Investment (Holdings) Limited (HKG:2008) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Phoenix Media Investment (Holdings)'s Debt?
You can click the graphic below for the historical numbers, but it shows that Phoenix Media Investment (Holdings) had HK$708.6m of debt in June 2019, down from HK$1.33b, one year before. However, it does have HK$5.49b in cash offsetting this, leading to net cash of HK$4.78b.
A Look At Phoenix Media Investment (Holdings)'s Liabilities
Zooming in on the latest balance sheet data, we can see that Phoenix Media Investment (Holdings) had liabilities of HK$3.42b due within 12 months and liabilities of HK$1.24b due beyond that. Offsetting these obligations, it had cash of HK$5.49b as well as receivables valued at HK$1.52b due within 12 months. So it actually has HK$2.35b more liquid assets than total liabilities.
This luscious liquidity implies that Phoenix Media Investment (Holdings)'s balance sheet is sturdy like a giant sequoia tree. On this view, it seems its balance sheet is as strong as a black-belt karate master. Succinctly put, Phoenix Media Investment (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Phoenix Media Investment (Holdings) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Phoenix Media Investment (Holdings) actually shrunk its revenue by 7.9%, to HK$3.9b. That's not what we would hope to see.
So How Risky Is Phoenix Media Investment (Holdings)?
While Phoenix Media Investment (Holdings) lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$50m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The next few years will be important as the business matures. For riskier companies like Phoenix Media Investment (Holdings) I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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