Does Wasu Media HoldingLtd (SZSE:000156) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Wasu Media Holding Co.,Ltd (SZSE:000156) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Wasu Media HoldingLtd

How Much Debt Does Wasu Media HoldingLtd Carry?

As you can see below, at the end of September 2024, Wasu Media HoldingLtd had CN¥1.65b of debt, up from CN¥1.26b a year ago. Click the image for more detail. However, it does have CN¥5.84b in cash offsetting this, leading to net cash of CN¥4.19b.

How Strong Is Wasu Media HoldingLtd's Balance Sheet?

We can see from the most recent balance sheet that Wasu Media HoldingLtd had liabilities of CN¥9.92b falling due within a year, and liabilities of CN¥3.30b due beyond that. On the other hand, it had cash of CN¥5.84b and CN¥3.80b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.58b.

This deficit isn't so bad because Wasu Media HoldingLtd is worth CN¥15.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Wasu Media HoldingLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Wasu Media HoldingLtd saw its EBIT drop by 8.7% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Wasu Media HoldingLtd will need earnings to service that debt. 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. Wasu Media HoldingLtd 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, Wasu Media HoldingLtd recorded free cash flow worth a fulsome 94% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While Wasu Media HoldingLtd does have more liabilities than liquid assets, it also has net cash of CN¥4.19b. And it impressed us with free cash flow of CN¥636m, being 94% of its EBIT. So we don't have any problem with Wasu Media HoldingLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Wasu Media HoldingLtd has 2 warning signs (and 1 which doesn't sit too well with us) we think 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.

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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.