David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Shandong Publishing&Media Co.,Ltd (SHSE:601019) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Shandong Publishing&MediaLtd's Net Debt?

As you can see below, Shandong Publishing&MediaLtd had CN¥95.5m of debt at December 2023, down from CN¥116.6m a year prior. But it also has CN¥8.79b in cash to offset that, meaning it has CN¥8.69b net cash.

How Healthy Is Shandong Publishing&MediaLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shandong Publishing&MediaLtd had liabilities of CN¥6.64b due within 12 months and liabilities of CN¥1.35b due beyond that. Offsetting this, it had CN¥8.79b in cash and CN¥1.61b in receivables that were due within 12 months. So it actually has CN¥2.40b more liquid assets than total liabilities.

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

Also good is that Shandong Publishing&MediaLtd grew its EBIT at 14% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shandong Publishing&MediaLtd'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 company can only pay off debt with cold hard cash, not accounting profits. Shandong Publishing&MediaLtd 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, Shandong Publishing&MediaLtd 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 it is always sensible to investigate a company's debt, in this case Shandong Publishing&MediaLtd has CN¥8.69b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.9b, being 117% of its EBIT. So we don't think Shandong Publishing&MediaLtd's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shandong Publishing&MediaLtd (of which 1 is significant!) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com