Does Beijing Enlight Media (SZSE:300251) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Beijing Enlight Media Co., Ltd. (SZSE:300251) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Beijing Enlight Media

How Much Debt Does Beijing Enlight Media Carry?

You can click the graphic below for the historical numbers, but it shows that Beijing Enlight Media had CN¥13.7m of debt in September 2024, down from CN¥32.4m, one year before. But it also has CN¥3.16b in cash to offset that, meaning it has CN¥3.15b net cash.

A Look At Beijing Enlight Media's Liabilities

The latest balance sheet data shows that Beijing Enlight Media had liabilities of CN¥1.08b due within a year, and liabilities of CN¥164.5m falling due after that. Offsetting this, it had CN¥3.16b in cash and CN¥256.8m in receivables that were due within 12 months. So it actually has CN¥2.17b more liquid assets than total liabilities.

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

Even more impressive was the fact that Beijing Enlight Media grew its EBIT by 535% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Beijing Enlight Media can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Beijing Enlight Media 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. Happily for any shareholders, Beijing Enlight Media actually produced more free cash flow than EBIT over the last three years. 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 it is always sensible to investigate a company's debt, in this case Beijing Enlight Media has CN¥3.15b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.1b, being 133% of its EBIT. So we don't think Beijing Enlight Media's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Beijing Enlight Media , and understanding them should be part of your investment process.

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.