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 note that Chengdu B-ray Media Co.,Ltd. (SHSE:600880) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Chengdu B-ray MediaLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Chengdu B-ray MediaLtd had CN¥110.6m in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds CN¥537.3m in cash, so it actually has CN¥426.8m net cash.

A Look At Chengdu B-ray MediaLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Chengdu B-ray MediaLtd had liabilities of CN¥566.3m due within 12 months and liabilities of CN¥148.4m due beyond that. Offsetting this, it had CN¥537.3m in cash and CN¥540.2m in receivables that were due within 12 months. So it actually has CN¥362.9m more liquid assets than total liabilities.

This surplus suggests that Chengdu B-ray MediaLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Chengdu B-ray MediaLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Chengdu B-ray MediaLtd has increased its EBIT by 3.8% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Chengdu B-ray MediaLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Chengdu B-ray MediaLtd 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. Looking at the most recent three years, Chengdu B-ray MediaLtd recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Chengdu B-ray MediaLtd has net cash of CN¥426.8m, as well as more liquid assets than liabilities. And it also grew its EBIT by 3.8% over the last year. So we don't have any problem with Chengdu B-ray MediaLtd's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Chengdu B-ray MediaLtd, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.