Is Jiangsu Phoenix Publishing & Media (SHSE:601928) 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.' 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. Importantly, Jiangsu Phoenix Publishing & Media Corporation Limited (SHSE:601928) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for Jiangsu Phoenix Publishing & Media

How Much Debt Does Jiangsu Phoenix Publishing & Media Carry?

The image below, which you can click on for greater detail, shows that Jiangsu Phoenix Publishing & Media had debt of CN¥117.0m at the end of September 2024, a reduction from CN¥151.3m over a year. But it also has CN¥3.87b in cash to offset that, meaning it has CN¥3.76b net cash.

How Strong Is Jiangsu Phoenix Publishing & Media's Balance Sheet?

According to the last reported balance sheet, Jiangsu Phoenix Publishing & Media had liabilities of CN¥10.7b due within 12 months, and liabilities of CN¥1.29b due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.87b as well as receivables valued at CN¥1.11b due within 12 months. So its liabilities total CN¥6.98b more than the combination of its cash and short-term receivables.

Jiangsu Phoenix Publishing & Media has a market capitalization of CN¥26.6b, 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. While it does have liabilities worth noting, Jiangsu Phoenix Publishing & Media also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Jiangsu Phoenix Publishing & Media saw its EBIT drop by 6.5% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Jiangsu Phoenix Publishing & Media can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jiangsu Phoenix Publishing & Media 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. Over the last three years, Jiangsu Phoenix Publishing & Media actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Jiangsu Phoenix Publishing & Media'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¥3.76b. The cherry on top was that in converted 132% of that EBIT to free cash flow, bringing in CN¥831m. So we don't have any problem with Jiangsu Phoenix Publishing & Media's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Jiangsu Phoenix Publishing & Media has 2 warning signs (and 1 which is significant) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.