Is Zhejiang Daily Digital Culture GroupLtd (SHSE:600633) A Risky Investment?

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 can see that Zhejiang Daily Digital Culture Group Co.,Ltd (SHSE:600633) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Zhejiang Daily Digital Culture GroupLtd

How Much Debt Does Zhejiang Daily Digital Culture GroupLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Zhejiang Daily Digital Culture GroupLtd had CN¥45.1m of debt in June 2024, down from CN¥706.7m, one year before. However, it does have CN¥1.53b in cash offsetting this, leading to net cash of CN¥1.49b.

A Look At Zhejiang Daily Digital Culture GroupLtd's Liabilities

We can see from the most recent balance sheet that Zhejiang Daily Digital Culture GroupLtd had liabilities of CN¥1.28b falling due within a year, and liabilities of CN¥262.0m due beyond that. Offsetting this, it had CN¥1.53b in cash and CN¥789.3m in receivables that were due within 12 months. So it can boast CN¥779.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Zhejiang Daily Digital Culture GroupLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Zhejiang Daily Digital Culture GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Zhejiang Daily Digital Culture GroupLtd's saving grace is its low debt levels, because its EBIT has tanked 22% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zhejiang Daily Digital Culture GroupLtd 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Zhejiang Daily Digital Culture GroupLtd 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, Zhejiang Daily Digital Culture GroupLtd recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Daily Digital Culture GroupLtd has CN¥1.49b in net cash and a decent-looking balance sheet. So we don't have any problem with Zhejiang Daily Digital Culture GroupLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Zhejiang Daily Digital Culture GroupLtd (1 doesn't sit too well with us!) that you should be aware of before investing here.

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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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.