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. As with many other companies Zhejiang Publishing & Media Co., Ltd. (SHSE:601921) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Zhejiang Publishing & Media Carry?

As you can see below, at the end of September 2024, Zhejiang Publishing & Media had CN¥12.0m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥11.2b in cash offsetting this, leading to net cash of CN¥11.2b.

How Healthy Is Zhejiang Publishing & Media's Balance Sheet?

According to the last reported balance sheet, Zhejiang Publishing & Media had liabilities of CN¥9.10b due within 12 months, and liabilities of CN¥426.3m due beyond 12 months. Offsetting this, it had CN¥11.2b in cash and CN¥1.12b in receivables that were due within 12 months. So it can boast CN¥2.78b more liquid assets than total liabilities.

This excess liquidity suggests that Zhejiang Publishing & Media is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Zhejiang Publishing & Media has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Zhejiang Publishing & Media's saving grace is its low debt levels, because its EBIT has tanked 35% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Publishing & 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Zhejiang Publishing & 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. Over the last three years, Zhejiang Publishing & 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 we empathize with investors who find debt concerning, you should keep in mind that Zhejiang Publishing & Media has net cash of CN¥11.2b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -CN¥76m, being 140% of its EBIT. So we don't think Zhejiang Publishing & Media's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Zhejiang Publishing & Media (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.