Is Beijing Enlight Media (SZSE:300251) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Beijing Enlight Media Co., Ltd. (SZSE:300251) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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

How Much Debt Does Beijing Enlight Media Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Beijing Enlight Media had debt of CN¥32.4m, up from CN¥22.0m in one year. However, it does have CN¥2.14b in cash offsetting this, leading to net cash of CN¥2.11b.

A Look At Beijing Enlight Media's Liabilities

We can see from the most recent balance sheet that Beijing Enlight Media had liabilities of CN¥887.3m falling due within a year, and liabilities of CN¥146.8m due beyond that. Offsetting this, it had CN¥2.14b in cash and CN¥496.2m in receivables that were due within 12 months. So it can boast CN¥1.61b 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.

In addition to that, we're happy to report that Beijing Enlight Media has boosted its EBIT by 30%, thus reducing the spectre of future debt repayments. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. 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 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 Beijing Enlight Media has CN¥2.11b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥68m, being 133% of its EBIT. So we don't think Beijing Enlight Media's use of debt is risky. While Beijing Enlight Media didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.