Does Focus Media Information Technology (SZSE:002027) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. We note that Focus Media Information Technology Co., Ltd. (SZSE:002027) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Focus Media Information Technology

What Is Focus Media Information Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Focus Media Information Technology had CN¥100.6m of debt, an increase on CN¥27.5m, over one year. However, its balance sheet shows it holds CN¥7.03b in cash, so it actually has CN¥6.93b net cash.

How Healthy Is Focus Media Information Technology's Balance Sheet?

The latest balance sheet data shows that Focus Media Information Technology had liabilities of CN¥6.20b due within a year, and liabilities of CN¥1.20b falling due after that. Offsetting these obligations, it had cash of CN¥7.03b as well as receivables valued at CN¥2.68b due within 12 months. So it actually has CN¥2.30b more liquid assets than total liabilities.

This short term liquidity is a sign that Focus Media Information Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Focus Media Information Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Focus Media Information Technology grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Focus Media Information Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Focus Media Information Technology 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. Happily for any shareholders, Focus Media Information Technology actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Focus Media Information Technology has net cash of CN¥6.93b, as well as more liquid assets than liabilities. The cherry on top was that in converted 169% of that EBIT to free cash flow, bringing in CN¥6.9b. So we don't think Focus Media Information Technology's use of debt is risky. 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. Be aware that Focus Media Information Technology is showing 1 warning sign in our investment analysis , you should know about...

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.