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 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 can see that China Publishing & Media Holdings Co., Ltd. (SHSE:601949) does use debt in its business. But is this debt a concern to shareholders?
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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is China Publishing & Media Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that China Publishing & Media Holdings had CN¥76.4m of debt in March 2024, down from CN¥433.9m, one year before. But it also has CN¥5.28b in cash to offset that, meaning it has CN¥5.20b net cash.
A Look At China Publishing & Media Holdings' Liabilities
We can see from the most recent balance sheet that China Publishing & Media Holdings had liabilities of CN¥4.06b falling due within a year, and liabilities of CN¥1.17b due beyond that. Offsetting these obligations, it had cash of CN¥5.28b as well as receivables valued at CN¥894.3m due within 12 months. So it can boast CN¥943.9m more liquid assets than total liabilities.
This surplus suggests that China Publishing & Media Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, China Publishing & Media Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that China Publishing & Media Holdings has boosted its EBIT by 61%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China Publishing & Media Holdings's earnings that will influence how the balance sheet holds up in the future. 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While China Publishing & Media Holdings 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. Over the most recent three years, China Publishing & Media Holdings recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While it is always sensible to investigate a company's debt, in this case China Publishing & Media Holdings has CN¥5.20b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 61% over the last year. So is China Publishing & Media Holdings'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. To that end, you should be aware of the 2 warning signs we've spotted with China Publishing & Media Holdings .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.