Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Zhejiang Daily Digital Culture Group Co.,Ltd (SHSE:600633) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Zhejiang Daily Digital Culture GroupLtd Carry?

As you can see below, Zhejiang Daily Digital Culture GroupLtd had CN¥137.5m of debt at March 2024, down from CN¥708.9m a year prior. However, its balance sheet shows it holds CN¥1.70b in cash, so it actually has CN¥1.56b net cash.

How Strong Is Zhejiang Daily Digital Culture GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that Zhejiang Daily Digital Culture GroupLtd had liabilities of CN¥1.28b falling due within a year, and liabilities of CN¥345.2m due beyond that. Offsetting this, it had CN¥1.70b in cash and CN¥814.4m in receivables that were due within 12 months. So it can boast CN¥891.7m more liquid assets than total liabilities.

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

It is just as well that Zhejiang Daily Digital Culture GroupLtd's load is not too heavy, because its EBIT was down 24% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Zhejiang Daily Digital Culture GroupLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Zhejiang Daily Digital Culture GroupLtd 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 most recent three years, Zhejiang Daily Digital Culture GroupLtd recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Zhejiang Daily Digital Culture GroupLtd has CN¥1.56b in net cash and a decent-looking balance sheet. So we don't have any problem with Zhejiang Daily Digital Culture GroupLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Zhejiang Daily Digital Culture GroupLtd , and understanding them should be part of your investment process.

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.