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. Importantly, Fujian Zitian Media Technology Co., Ltd. (SZSE:300280) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Fujian Zitian Media Technology

What Is Fujian Zitian Media Technology's Net Debt?

As you can see below, Fujian Zitian Media Technology had CN¥347.4m of debt at September 2023, down from CN¥406.1m a year prior. However, its balance sheet shows it holds CN¥435.0m in cash, so it actually has CN¥87.6m net cash.

A Look At Fujian Zitian Media Technology's Liabilities

The latest balance sheet data shows that Fujian Zitian Media Technology had liabilities of CN¥1.56b due within a year, and liabilities of CN¥1.54m falling due after that. Offsetting these obligations, it had cash of CN¥435.0m as well as receivables valued at CN¥1.70b due within 12 months. So it can boast CN¥574.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Fujian Zitian Media Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Fujian Zitian Media Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Fujian Zitian Media Technology grew its EBIT by 249% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Fujian Zitian Media Technology'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Fujian Zitian Media Technology 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. Over the last three years, Fujian Zitian Media Technology saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Fujian Zitian Media Technology has net cash of CN¥87.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 249% year-on-year EBIT growth. So we are not troubled with Fujian Zitian Media Technology's debt use. 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. For example - Fujian Zitian Media Technology has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.