Is Xinhua Winshare Publishing and Media (HKG:811) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Xinhua Winshare Publishing and Media Co., Ltd. (HKG:811) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. When we think about a company's use of debt, we first look at cash and debt 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 June 2021 Xinhua Winshare Publishing and Media had debt of CN¥102.5m, up from none in one year. However, it does have CN¥5.27b in cash offsetting this, leading to net cash of CN¥5.16b.

How Strong 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¥6.45b due within a year, and liabilities of CN¥353.1m falling due after that. On the other hand, it had cash of CN¥5.27b and CN¥1.97b worth of receivables due within a year. So it actually has CN¥432.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Xinhua Winshare Publishing and Media could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 54% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Xinhua Winshare Publishing and Media's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. 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 Xinhua Winshare Publishing and Media has CN¥5.16b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 129% of that EBIT to free cash flow, bringing in CN¥1.7b. So is Xinhua Winshare Publishing and Media's debt a risk? It doesn't seem so to us. 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 Xinhua Winshare Publishing and Media you should be aware of.

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.
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