Wasu Media HoldingLtd (SZSE:000156) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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. Importantly, Wasu Media Holding Co.,Ltd (SZSE:000156) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Wasu Media HoldingLtd

How Much Debt Does Wasu Media HoldingLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Wasu Media HoldingLtd had debt of CN¥1.65b, up from CN¥1.26b in one year. But it also has CN¥5.84b in cash to offset that, meaning it has CN¥4.19b net cash.

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How Healthy Is Wasu Media HoldingLtd's Balance Sheet?

The latest balance sheet data shows that Wasu Media HoldingLtd had liabilities of CN¥9.92b due within a year, and liabilities of CN¥3.30b falling due after 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 total CN¥3.58b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Wasu Media HoldingLtd has a market capitalization of CN¥17.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Wasu Media HoldingLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that Wasu Media HoldingLtd saw its EBIT decline by 8.7% over the last year. 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 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. While Wasu Media HoldingLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Wasu Media HoldingLtd generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

Although Wasu Media HoldingLtd'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¥4.19b. And it impressed us with free cash flow of CN¥636m, being 94% of its EBIT. So we are not troubled with Wasu Media HoldingLtd'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. To that end, you should learn about the 2 warning signs we've spotted with Wasu Media HoldingLtd (including 1 which shouldn't be ignored) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.