These 4 Measures Indicate That Zhejiang Daily Digital Culture GroupLtd (SHSE:600633) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Zhejiang Daily Digital Culture Group Co.,Ltd (SHSE:600633) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Zhejiang Daily Digital Culture GroupLtd

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

The image below, which you can click on for greater detail, shows that Zhejiang Daily Digital Culture GroupLtd had debt of CN¥83.6m at the end of September 2024, a reduction from CN¥718.9m over a year. However, its balance sheet shows it holds CN¥1.35b in cash, so it actually has CN¥1.26b net cash.

How Healthy Is Zhejiang Daily Digital Culture GroupLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhejiang Daily Digital Culture GroupLtd had liabilities of CN¥1.27b due within 12 months and liabilities of CN¥251.3m due beyond that. Offsetting these obligations, it had cash of CN¥1.35b as well as receivables valued at CN¥999.1m due within 12 months. So it can boast CN¥826.4m 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!

But the bad news is that Zhejiang Daily Digital Culture GroupLtd has seen its EBIT plunge 20% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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, a company can only pay off debt with cold hard cash, not accounting profits. Zhejiang Daily Digital Culture GroupLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Zhejiang Daily Digital Culture GroupLtd recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Daily Digital Culture GroupLtd has CN¥1.26b in net cash and a decent-looking balance sheet. So we are not troubled with Zhejiang Daily Digital Culture GroupLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Zhejiang Daily Digital Culture GroupLtd , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.