Is Zhejiang Daily Digital Culture GroupLtd (SHSE:600633) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Zhejiang Daily Digital Culture Group Co.,Ltd (SHSE:600633) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Zhejiang Daily Digital Culture GroupLtd

What Is Zhejiang Daily Digital Culture GroupLtd's Net Debt?

As you can see below, Zhejiang Daily Digital Culture GroupLtd had CN¥426.9m of debt at December 2023, down from CN¥473.8m a year prior. But it also has CN¥2.20b in cash to offset that, meaning it has CN¥1.78b net cash.

A Look At Zhejiang Daily Digital Culture GroupLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Zhejiang Daily Digital Culture GroupLtd had liabilities of CN¥1.52b due within 12 months and liabilities of CN¥642.9m due beyond that. Offsetting this, it had CN¥2.20b in cash and CN¥665.5m in receivables that were due within 12 months. So it can boast CN¥709.5m 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. Simply put, the fact that Zhejiang Daily Digital Culture GroupLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Zhejiang Daily Digital Culture GroupLtd's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Zhejiang Daily Digital Culture GroupLtd produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. 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 Zhejiang Daily Digital Culture GroupLtd has CN¥1.78b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in CN¥514m. So we are not troubled with Zhejiang Daily Digital Culture GroupLtd's debt use. 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. Case in point: We've spotted 1 warning sign for Zhejiang Daily Digital Culture GroupLtd you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.