Is Chengdu B-ray MediaLtd (SHSE:600880) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Chengdu B-ray Media Co.,Ltd. (SHSE:600880) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Chengdu B-ray MediaLtd's Net Debt?

As you can see below, at the end of September 2024, Chengdu B-ray MediaLtd had CN¥165.0m of debt, up from CN¥48.9m a year ago. Click the image for more detail. But it also has CN¥433.1m in cash to offset that, meaning it has CN¥268.2m net cash.

A Look At Chengdu B-ray MediaLtd's Liabilities

According to the last reported balance sheet, Chengdu B-ray MediaLtd had liabilities of CN¥600.7m due within 12 months, and liabilities of CN¥146.0m due beyond 12 months. Offsetting this, it had CN¥433.1m in cash and CN¥518.8m in receivables that were due within 12 months. So it actually has 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!

View our latest analysis for Chengdu B-ray MediaLtd

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. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, Chengdu B-ray MediaLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Chengdu B-ray MediaLtd has net cash of CN¥268.2m, as well as more liquid assets than liabilities. 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. However, not all investment risk resides within the balance sheet - far from it. 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.