We Think China Publishing & Media Holdings (SHSE:601949) Can Stay On Top Of Its Debt

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.' 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. Importantly, China Publishing & Media Holdings Co., Ltd. (SHSE:601949) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does China Publishing & Media Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that China Publishing & Media Holdings had CN¥66.1m of debt in September 2024, down from CN¥99.0m, one year before. However, it does have CN¥5.40b in cash offsetting this, leading to net cash of CN¥5.34b.

How Healthy Is China Publishing & Media Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Publishing & Media Holdings had liabilities of CN¥4.28b due within 12 months and liabilities of CN¥1.18b due beyond that. 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 actually has CN¥826.9m more liquid assets than total liabilities.

This surplus suggests that China Publishing & Media Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, China Publishing & Media Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for China Publishing & Media Holdings

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 a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Publishing & Media Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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. 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 instance, we've identified 1 warning sign for China Publishing & Media Holdings that you should be aware of.

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.