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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Time Publishing and Media Co., Ltd. (SHSE:600551) makes use of debt. But the more important question is: how much risk is that debt creating?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
View our latest analysis for Time Publishing and Media
What Is Time Publishing and Media's Debt?
As you can see below, at the end of September 2023, Time Publishing and Media had CN¥312.5m of debt, up from CN¥92.1m a year ago. Click the image for more detail. But it also has CN¥2.99b in cash to offset that, meaning it has CN¥2.68b net cash.
How Healthy Is Time Publishing and Media's Balance Sheet?
We can see from the most recent balance sheet that Time Publishing and Media had liabilities of CN¥2.86b falling due within a year, and liabilities of CN¥96.4m due beyond that. Offsetting this, it had CN¥2.99b in cash and CN¥881.3m in receivables that were due within 12 months. So it can boast CN¥914.2m more liquid assets than total liabilities.
This excess liquidity suggests that Time Publishing and Media is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Time Publishing and Media has more cash than debt is arguably a good indication that it can manage its debt safely.
On the other hand, Time Publishing and Media saw its EBIT drop by 5.3% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its 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 Time Publishing and Media 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Time Publishing and Media has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Time Publishing and Media actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
While it is always sensible to investigate a company's debt, in this case Time Publishing and Media has CN¥2.68b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 198% of that EBIT to free cash flow, bringing in CN¥633m. So is Time Publishing and Media's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Time Publishing and Media that you should be aware of before investing here.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.