Does Southern Publishing and MediaLtd (SHSE:601900) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Southern Publishing and Media Co.,Ltd. (SHSE:601900) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Southern Publishing and MediaLtd

What Is Southern Publishing and MediaLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Southern Publishing and MediaLtd had CN¥1.32b of debt, an increase on CN¥789.9m, over one year. However, its balance sheet shows it holds CN¥3.17b in cash, so it actually has CN¥1.85b net cash.

How Healthy Is Southern Publishing and MediaLtd's Balance Sheet?

The latest balance sheet data shows that Southern Publishing and MediaLtd had liabilities of CN¥6.30b due within a year, and liabilities of CN¥1.81b falling due after that. Offsetting this, it had CN¥3.17b in cash and CN¥2.03b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.91b.

This deficit isn't so bad because Southern Publishing and MediaLtd is worth CN¥12.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Southern Publishing and MediaLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that Southern Publishing and MediaLtd saw its EBIT decline by 4.1% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Southern Publishing and 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Southern Publishing and 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. Happily for any shareholders, Southern Publishing and MediaLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Southern Publishing and MediaLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.85b. The cherry on top was that in converted 125% of that EBIT to free cash flow, bringing in CN¥515m. So we are not troubled with Southern Publishing and MediaLtd's debt use. 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 Southern Publishing and MediaLtd is showing 1 warning sign in our investment analysis , you should know about...

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.