Is Changjiang Publishing & MediaLtd (SHSE:600757) A Risky Investment?

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 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 note that Changjiang Publishing & Media Co.,Ltd (SHSE:600757) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Changjiang Publishing & MediaLtd

What Is Changjiang Publishing & MediaLtd's Debt?

As you can see below, at the end of September 2023, Changjiang Publishing & MediaLtd had CN¥25.4m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥1.57b in cash to offset that, meaning it has CN¥1.54b net cash.

How Strong Is Changjiang Publishing & MediaLtd's Balance Sheet?

The latest balance sheet data shows that Changjiang Publishing & MediaLtd had liabilities of CN¥4.54b due within a year, and liabilities of CN¥139.3m falling due after that. Offsetting these obligations, it had cash of CN¥1.57b as well as receivables valued at CN¥1.36b due within 12 months. So it has liabilities totalling CN¥1.74b more than its cash and near-term receivables, combined.

Since publicly traded Changjiang Publishing & MediaLtd shares are worth a total of CN¥9.54b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Changjiang Publishing & MediaLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Changjiang Publishing & MediaLtd grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Changjiang Publishing & MediaLtd will need earnings to service that debt. 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 Changjiang Publishing & MediaLtd 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, Changjiang Publishing & MediaLtd 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 Changjiang Publishing & MediaLtd does have more liabilities than liquid assets, it also has net cash of CN¥1.54b. And it impressed us with free cash flow of CN¥1.7b, being 167% of its EBIT. So is Changjiang Publishing & MediaLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Changjiang Publishing & MediaLtd you should know about.

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.