Beijing Enlight Media (SZSE:300251) Seems To Use Debt Quite Sensibly

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.' 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 can see that Beijing Enlight Media Co., Ltd. (SZSE:300251) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Beijing Enlight Media

What Is Beijing Enlight Media's Debt?

As you can see below, Beijing Enlight Media had CN¥25.3m of debt at March 2024, down from CN¥44.1m a year prior. However, its balance sheet shows it holds CN¥2.59b in cash, so it actually has CN¥2.56b net cash.

How Healthy Is Beijing Enlight Media's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Enlight Media had liabilities of CN¥1.08b due within 12 months and liabilities of CN¥168.0m due beyond that. Offsetting this, it had CN¥2.59b in cash and CN¥1.15b in receivables that were due within 12 months. So it can boast CN¥2.49b more liquid assets than total liabilities.

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

Although Beijing Enlight Media made a loss at the EBIT level, last year, it was also good to see that it generated CN¥801m in EBIT over the last twelve months. 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 Beijing Enlight Media'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. Beijing Enlight Media 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 most recent year, Beijing Enlight Media recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Enlight Media has CN¥2.56b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in CN¥534m. So is Beijing Enlight Media's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Beijing Enlight Media that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.