The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Jiangsu Phoenix Publishing & Media Corporation Limited (SHSE:601928) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Jiangsu Phoenix Publishing & Media's Debt?

The image below, which you can click on for greater detail, shows that Jiangsu Phoenix Publishing & Media had debt of CN¥49.9m at the end of June 2024, a reduction from CN¥96.1m over a year. However, it does have CN¥9.05b in cash offsetting this, leading to net cash of CN¥9.00b.

How Healthy Is Jiangsu Phoenix Publishing & Media's Balance Sheet?

According to the last reported balance sheet, Jiangsu Phoenix Publishing & Media had liabilities of CN¥10.9b due within 12 months, and liabilities of CN¥1.30b due beyond 12 months. On the other hand, it had cash of CN¥9.05b and CN¥1.80b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.31b.

Since publicly traded Jiangsu Phoenix Publishing & Media shares are worth a total of CN¥27.1b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Jiangsu Phoenix Publishing & Media also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Jiangsu Phoenix Publishing & Media has increased its EBIT by 4.7% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangsu Phoenix Publishing & Media 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jiangsu Phoenix 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. Happily for any shareholders, Jiangsu Phoenix Publishing & Media actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Jiangsu Phoenix Publishing & Media has CN¥9.00b in net cash. The cherry on top was that in converted 117% of that EBIT to free cash flow, bringing in CN¥1.0b. So is Jiangsu Phoenix Publishing & Media's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 2 warning signs for Jiangsu Phoenix Publishing & Media you should be aware of, and 1 of them can't be ignored.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.