We Think Focus Media Information Technology (SZSE:002027) Can Manage Its Debt With Ease

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. As with many other companies Focus Media Information Technology Co., Ltd. (SZSE:002027) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Focus Media Information Technology

How Much Debt Does Focus Media Information Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Focus Media Information Technology had debt of CN¥162.6m, up from CN¥30.1m in one year. However, it does have CN¥6.41b in cash offsetting this, leading to net cash of CN¥6.25b.

A Look At Focus Media Information Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Focus Media Information Technology had liabilities of CN¥5.31b due within 12 months and liabilities of CN¥1.17b due beyond that. Offsetting this, it had CN¥6.41b in cash and CN¥2.87b in receivables that were due within 12 months. So it can boast CN¥2.80b more liquid assets than total liabilities.

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

And we also note warmly that Focus Media Information Technology grew its EBIT by 15% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Focus Media Information Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Over the last three years, Focus Media Information Technology actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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¥6.25b, as well as more liquid assets than liabilities. The cherry on top was that in converted 170% of that EBIT to free cash flow, bringing in CN¥6.7b. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Focus Media Information Technology you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.