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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that China Publishing & Media Holdings Co., Ltd. (SHSE:601949) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is China Publishing & Media Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that China Publishing & Media Holdings had debt of CN¥76.4m at the end of March 2024, a reduction from CN¥433.9m over a year. But on the other hand it also has CN¥5.99b in cash, leading to a CN¥5.91b net cash position.

How Strong Is China Publishing & Media Holdings' Balance Sheet?

According to the last reported balance sheet, China Publishing & Media Holdings had liabilities of CN¥4.06b due within 12 months, and liabilities of CN¥1.17b due beyond 12 months. On the other hand, it had cash of CN¥5.99b and CN¥894.3m worth of receivables due within a year. So it actually has CN¥1.66b more liquid assets than total liabilities.

This surplus suggests that China Publishing & Media Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, China Publishing & Media Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that China Publishing & Media Holdings has seen its EBIT plunge 17% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But it is China Publishing & Media Holdings'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. China Publishing & Media Holdings 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, China Publishing & Media Holdings recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Publishing & Media Holdings has CN¥5.91b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in CN¥562m. So we don't think China Publishing & Media Holdings's use of debt is risky. 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 - China Publishing & Media Holdings has 3 warning signs we think you should be aware of.

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