Southern Publishing and MediaLtd (SHSE:601900) Seems To Use Debt Quite Sensibly

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. Importantly, Southern Publishing and Media Co.,Ltd. (SHSE:601900) does carry debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Southern Publishing and MediaLtd Carry?

As you can see below, at the end of September 2024, Southern Publishing and MediaLtd had CN¥1.33b of debt, up from CN¥873.2m a year ago. Click the image for more detail. But it also has CN¥2.51b in cash to offset that, meaning it has CN¥1.18b net cash.

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

We can see from the most recent balance sheet that Southern Publishing and MediaLtd had liabilities of CN¥6.79b falling due within a year, and liabilities of CN¥2.00b due beyond that. Offsetting these obligations, it had cash of CN¥2.51b as well as receivables valued at CN¥3.18b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.11b.

Southern Publishing and MediaLtd has a market capitalization of CN¥14.1b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

View our latest analysis for Southern Publishing and MediaLtd

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. 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 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.

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. 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. And it impressed us with free cash flow of -CN¥154m, being 85% of its EBIT. So we don't think Southern Publishing and MediaLtd's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Southern Publishing and MediaLtd (of which 1 is a bit unpleasant!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.