Chengdu B-ray MediaLtd (SHSE:600880) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Chengdu B-ray Media Co.,Ltd. (SHSE:600880) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Chengdu B-ray MediaLtd

What Is Chengdu B-ray MediaLtd's Debt?

As you can see below, Chengdu B-ray MediaLtd had CN¥48.9m of debt at September 2023, down from CN¥99.0m a year prior. But it also has CN¥360.0m in cash to offset that, meaning it has CN¥311.1m net cash.

A Look At Chengdu B-ray MediaLtd's Liabilities

The latest balance sheet data shows that Chengdu B-ray MediaLtd had liabilities of CN¥467.4m due within a year, and liabilities of CN¥110.4m falling due after that. Offsetting this, it had CN¥360.0m in cash and CN¥513.5m in receivables that were due within 12 months. So it actually has CN¥295.7m more liquid assets than total liabilities.

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

On the other hand, Chengdu B-ray MediaLtd saw its EBIT drop by 8.2% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Chengdu B-ray MediaLtd 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 Chengdu B-ray 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. Considering the last three years, Chengdu B-ray MediaLtd actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case Chengdu B-ray MediaLtd has CN¥311.1m in net cash and a decent-looking balance sheet. So we are not troubled with Chengdu B-ray MediaLtd'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. We've identified 1 warning sign with Chengdu B-ray MediaLtd , and understanding them should be part of your investment process.

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.