Is Shandong Publishing&MediaLtd (SHSE:601019) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Shandong Publishing&Media Co.,Ltd (SHSE:601019) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Shandong Publishing&MediaLtd

What Is Shandong Publishing&MediaLtd's Net Debt?

As you can see below, Shandong Publishing&MediaLtd had CN¥18.0m of debt at September 2023, down from CN¥68.6m a year prior. But on the other hand it also has CN¥8.80b in cash, leading to a CN¥8.78b net cash position.

A Look At Shandong Publishing&MediaLtd's Liabilities

According to the last reported balance sheet, Shandong Publishing&MediaLtd had liabilities of CN¥7.16b due within 12 months, and liabilities of CN¥1.27b due beyond 12 months. Offsetting this, it had CN¥8.80b in cash and CN¥2.34b in receivables that were due within 12 months. So it actually has CN¥2.70b more liquid assets than total liabilities.

This surplus suggests that Shandong Publishing&MediaLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shandong Publishing&MediaLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Shandong Publishing&MediaLtd grew its EBIT by 12% last year, making its debt load easier to handle. 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 Shandong Publishing&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 company can only pay off debt with cold hard cash, not accounting profits. Shandong Publishing&MediaLtd 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. Over the last three years, Shandong Publishing&MediaLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shandong Publishing&MediaLtd has net cash of CN¥8.78b, as well as more liquid assets than liabilities. The cherry on top was that in converted 112% of that EBIT to free cash flow, bringing in CN¥2.4b. So is Shandong Publishing&MediaLtd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shandong Publishing&MediaLtd is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.