iQIYI (NASDAQ:IQ) Is Making Moderate Use Of Debt

iQIYI (NASDAQ:IQ) Is Making Moderate Use Of Debt

David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that iQIYI, Inc. (NASDAQ:IQ) does have debt on its balance sheet. But should shareholders be worried about its use of debt?To get more iQIYI news, you can visit shine news official website.

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

You can click the graphic below for the historical numbers, but it shows that as of March 2020 iQIYI had CN¥16.8b of debt, an increase on CN¥15.9b, over one year. On the flip side, it has CN¥8.95b in cash leading to net debt of about CN¥7.86b.

According to the last reported balance sheet, iQIYI had liabilities of CN¥20.9b due within 12 months, and liabilities of CN¥15.3b due beyond 12 months. On the other hand, it had cash of CN¥8.95b and CN¥4.58b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥22.6b.

Given iQIYI has a humongous market capitalization of CN¥118.1b, it’s hard to believe these liabilities pose much threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine iQIYI’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.

In the last year iQIYI wasn’t profitable at an EBIT level, but managed to grow its revenue by 9.4%, to CN¥30b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.Over the last twelve months iQIYI produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥9.5b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn’t help that it burned through CN¥8.9b of cash over the last year. So suffice it to say we consider the stock very risky. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we’ve spotted with iQIYI .

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