Focus Media Information Technology (SZSE:002027) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Focus Media Information Technology Co., Ltd. (SZSE:002027) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Focus Media Information Technology

What Is Focus Media Information Technology's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Focus Media Information Technology had debt of CN¥78.6m, up from CN¥9.45m in one year. However, it does have CN¥9.31b in cash offsetting this, leading to net cash of CN¥9.23b.

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

We can see from the most recent balance sheet that Focus Media Information Technology had liabilities of CN¥4.94b falling due within a year, and liabilities of CN¥1.18b due beyond that. Offsetting this, it had CN¥9.31b in cash and CN¥2.12b in receivables that were due within 12 months. So it can boast CN¥5.31b 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 92% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Focus Media Information Technology has CN¥9.23b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥6.6b, being 170% of its EBIT. So is Focus Media Information Technology's debt a risk? It doesn't seem so to us. 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com