We Think Anhui Xinhua Media (SHSE:601801) Can Manage Its Debt With Ease

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Anhui Xinhua Media Co., Ltd. (SHSE:601801) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Anhui Xinhua Media

How Much Debt Does Anhui Xinhua Media Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Anhui Xinhua Media had CN¥1.30b of debt, an increase on CN¥288.9m, over one year. But it also has CN¥10.9b in cash to offset that, meaning it has CN¥9.65b net cash.

How Strong Is Anhui Xinhua Media's Balance Sheet?

We can see from the most recent balance sheet that Anhui Xinhua Media had liabilities of CN¥6.73b falling due within a year, and liabilities of CN¥932.0m due beyond that. Offsetting this, it had CN¥10.9b in cash and CN¥2.40b in receivables that were due within 12 months. So it actually has CN¥5.68b more liquid assets than total liabilities.

This excess liquidity is a great indication that Anhui Xinhua Media's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Anhui Xinhua Media boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Anhui Xinhua Media has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Anhui Xinhua 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. Anhui Xinhua 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, Anhui Xinhua 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 we empathize with investors who find debt concerning, you should keep in mind that Anhui Xinhua Media has net cash of CN¥9.65b, as well as more liquid assets than liabilities. The cherry on top was that in converted 160% of that EBIT to free cash flow, bringing in CN¥144m. At the end of the day we're not concerned about Anhui Xinhua Media's debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Anhui Xinhua Media has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.