Is Anhui Xinhua Media (SHSE:601801) Using Too Much Debt?

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.' 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. We can see that Anhui Xinhua Media Co., Ltd. (SHSE:601801) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Anhui Xinhua Media

What Is Anhui Xinhua Media's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Anhui Xinhua Media had debt of CN¥1.39b, up from CN¥1.05b in one year. However, its balance sheet shows it holds CN¥11.9b in cash, so it actually has CN¥10.5b net cash.

How Healthy Is Anhui Xinhua Media's Balance Sheet?

According to the last reported balance sheet, Anhui Xinhua Media had liabilities of CN¥7.42b due within 12 months, and liabilities of CN¥857.0m due beyond 12 months. On the other hand, it had cash of CN¥11.9b and CN¥1.69b worth of receivables due within a year. So it can boast CN¥5.33b more liquid assets than total liabilities.

This surplus liquidity suggests that Anhui Xinhua Media's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Anhui Xinhua Media has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Anhui Xinhua Media grew its EBIT by 25% in the last year, and that should make it 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 Anhui Xinhua Media 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Anhui Xinhua 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. Over the last three years, Anhui Xinhua Media 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 Anhui Xinhua Media has net cash of CN¥10.5b, as well as more liquid assets than liabilities. The cherry on top was that in converted 152% of that EBIT to free cash flow, bringing in CN¥1.4b. The bottom line is that we do not find Anhui Xinhua Media's debt levels at all concerning. 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. Case in point: We've spotted 1 warning sign for Anhui Xinhua Media you should be aware of.

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.

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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.