We Think Southern Publishing and MediaLtd (SHSE:601900) Can Stay On Top Of Its Debt

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.' 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 Southern Publishing and Media Co.,Ltd. (SHSE:601900) does use debt in its business. But the real question is whether this debt is making the company risky.

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Southern Publishing and MediaLtd

How Much Debt Does Southern Publishing and MediaLtd Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Southern Publishing and MediaLtd had debt of CN¥1.32b, up from CN¥789.9m in one year. However, its balance sheet shows it holds CN¥3.17b in cash, so it actually has CN¥1.85b net cash.

A Look At Southern Publishing and MediaLtd's Liabilities

We can see from the most recent balance sheet that Southern Publishing and MediaLtd had liabilities of CN¥6.30b falling due within a year, and liabilities of CN¥1.81b due beyond that. Offsetting this, it had CN¥3.17b in cash and CN¥2.03b in receivables that were due within 12 months. So it has liabilities totalling CN¥2.91b more than its cash and near-term receivables, combined.

Southern Publishing and MediaLtd has a market capitalization of CN¥10.1b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Southern Publishing and MediaLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Southern Publishing and MediaLtd saw its EBIT drop by 4.1% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Southern Publishing and MediaLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Southern Publishing and MediaLtd does have more liabilities than liquid assets, it also has net cash of CN¥1.85b. And it impressed us with free cash flow of CN¥515m, being 125% of its EBIT. So we are not troubled with Southern Publishing and MediaLtd's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Southern Publishing and MediaLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.