Is Southern Publishing and MediaLtd (SHSE:601900) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Southern Publishing and Media Co.,Ltd. (SHSE:601900) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 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 Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Southern Publishing and MediaLtd had debt of CN¥1.33b, up from CN¥873.2m in one year. However, its balance sheet shows it holds CN¥2.51b in cash, so it actually has CN¥1.18b net cash.

A Look At Southern Publishing and MediaLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Southern Publishing and MediaLtd had liabilities of CN¥6.79b due within 12 months and liabilities of CN¥2.00b due beyond that. Offsetting this, it had CN¥2.51b in cash and CN¥3.18b in receivables that were due within 12 months. So its liabilities total CN¥3.11b more than the combination of its cash and short-term receivables.

Southern Publishing and MediaLtd has a market capitalization of CN¥13.2b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

The good news is that Southern Publishing and MediaLtd has increased its EBIT by 7.3% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Southern Publishing and MediaLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Southern Publishing and 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, Southern Publishing and MediaLtd generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

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¥1.18b. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in -CN¥154m. So is Southern Publishing and MediaLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Southern Publishing and MediaLtd has 1 warning sign we think you should be aware of.

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.