These 4 Measures Indicate That China Publishing & Media Holdings (SHSE:601949) Is Using Debt Reasonably Well

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. We note that China Publishing & Media Holdings Co., Ltd. (SHSE:601949) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for China Publishing & Media Holdings

What Is China Publishing & Media Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that China Publishing & Media Holdings had debt of CN¥66.1m at the end of September 2024, a reduction from CN¥99.0m over a year. But on the other hand it also has CN¥5.40b in cash, leading to a CN¥5.34b net cash position.

A Look At China Publishing & Media Holdings' Liabilities

According to the last reported balance sheet, China Publishing & Media Holdings had liabilities of CN¥4.28b due within 12 months, and liabilities of CN¥1.18b due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.40b as well as receivables valued at CN¥888.6m due within 12 months. So it can boast CN¥826.9m more liquid assets than total liabilities.

This short term liquidity is a sign that China Publishing & Media Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, China Publishing & Media Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for China Publishing & Media Holdings if management cannot prevent a repeat of the 32% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is China Publishing & Media Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. China Publishing & Media Holdings 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, China Publishing & Media Holdings produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Publishing & Media Holdings has CN¥5.34b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥359m, being 77% of its EBIT. So we don't have any problem with China Publishing & Media Holdings's use of debt. 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. For example - China Publishing & Media Holdings has 1 warning sign we think you should be aware of.

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.