Is Xinhua Winshare Publishing and Media (HKG:811) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Xinhua Winshare Publishing and Media Co., Ltd. (HKG:811) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Xinhua Winshare Publishing and Media

What Is Xinhua Winshare Publishing and Media's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Xinhua Winshare Publishing and Media had debt of CN¥101.7m, up from none in one year. However, its balance sheet shows it holds CN¥6.04b in cash, so it actually has CN¥5.94b net cash.

How Healthy Is Xinhua Winshare Publishing and Media's Balance Sheet?

The latest balance sheet data shows that Xinhua Winshare Publishing and Media had liabilities of CN¥7.34b due within a year, and liabilities of CN¥323.6m falling due after that. Offsetting this, it had CN¥6.04b in cash and CN¥1.71b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Xinhua Winshare Publishing and Media's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥6.35b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Xinhua Winshare Publishing and Media has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Xinhua Winshare Publishing and Media grew its EBIT by 30% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Xinhua Winshare Publishing and Media will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Xinhua Winshare Publishing and 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, Xinhua Winshare Publishing and Media actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Xinhua Winshare Publishing and Media has CN¥5.94b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.8b, being 146% of its EBIT. So is Xinhua Winshare Publishing and Media's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Xinhua Winshare Publishing and Media you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.