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.' 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. As with many other companies Time Publishing and Media Co., Ltd. (SHSE:600551) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Time Publishing and Media's Debt?

As you can see below, at the end of March 2024, Time Publishing and Media had CN¥383.3m of debt, up from CN¥205.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥3.24b in cash, so it actually has CN¥2.86b net cash.

How Healthy Is Time Publishing and Media's Balance Sheet?

We can see from the most recent balance sheet that Time Publishing and Media had liabilities of CN¥3.14b falling due within a year, and liabilities of CN¥91.7m due beyond that. Offsetting these obligations, it had cash of CN¥3.24b as well as receivables valued at CN¥982.9m due within 12 months. So it actually has CN¥993.5m more liquid assets than total liabilities.

This surplus suggests that Time Publishing and Media is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Time Publishing and Media boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Time Publishing and Media grew its EBIT by 55% 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 future earnings, more than anything, that will determine Time Publishing and Media'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. Time Publishing and Media 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, Time Publishing and Media actually produced more free cash flow than EBIT. 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 Time Publishing and Media has CN¥2.86b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥739m, being 213% of its EBIT. When it comes to Time Publishing and Media's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. For example Time Publishing and Media has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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