Here's Why Chengdu B-ray MediaLtd (SHSE:600880) Has A Meaningful Debt Burden

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.' 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. We can see that Chengdu B-ray Media Co.,Ltd. (SHSE:600880) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Chengdu B-ray MediaLtd

What Is Chengdu B-ray MediaLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Chengdu B-ray MediaLtd had debt of CN¥165.0m, up from CN¥48.9m in one year. But on the other hand it also has CN¥433.1m in cash, leading to a CN¥268.2m net cash position.

How Healthy Is Chengdu B-ray MediaLtd's Balance Sheet?

We can see from the most recent balance sheet that Chengdu B-ray MediaLtd had liabilities of CN¥600.7m falling due within a year, and liabilities of CN¥146.0m due beyond that. On the other hand, it had cash of CN¥433.1m and CN¥518.8m worth of receivables due within a year. So it can boast CN¥205.2m 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!

The modesty of its debt load may become crucial for Chengdu B-ray MediaLtd if management cannot prevent a repeat of the 67% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Chengdu B-ray MediaLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Chengdu B-ray MediaLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Chengdu B-ray MediaLtd has CN¥268.2m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Chengdu B-ray MediaLtd's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Chengdu B-ray MediaLtd has 1 warning sign we think you should be aware of.

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.