China South Publishing & Media Group (SHSE:601098) Could Easily Take On More Debt

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 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 China South Publishing & Media Group Co., Ltd (SHSE:601098) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for China South Publishing & Media Group

What Is China South Publishing & Media Group's Net Debt?

As you can see below, China South Publishing & Media Group had CN¥95.5m of debt at September 2023, down from CN¥276.1m a year prior. But on the other hand it also has CN¥10.4b in cash, leading to a CN¥10.3b net cash position.

A Look At China South Publishing & Media Group's Liabilities

According to the last reported balance sheet, China South Publishing & Media Group had liabilities of CN¥8.60b due within 12 months, and liabilities of CN¥742.4m due beyond 12 months. Offsetting this, it had CN¥10.4b in cash and CN¥2.14b in receivables that were due within 12 months. So it can boast CN¥3.20b more liquid assets than total liabilities.

This excess liquidity suggests that China South Publishing & Media Group is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, China South Publishing & Media Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that China South Publishing & Media Group has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. 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 China South Publishing & Media Group can strengthen its balance sheet over time. 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. While China South Publishing & Media Group 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. Over the most recent three years, China South Publishing & Media Group recorded free cash flow worth 55% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case China South Publishing & Media Group has CN¥10.3b in net cash and a decent-looking balance sheet. And we liked the look of last year's 25% year-on-year EBIT growth. So we don't think China South Publishing & Media Group's use of debt is risky. Given China South Publishing & Media Group has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.