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.' 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. Importantly, Southern Publishing and Media Co.,Ltd. (SHSE:601900) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Southern Publishing and MediaLtd Carry?

As you can see below, at the end of September 2024, Southern Publishing and MediaLtd had CN¥1.33b of debt, up from CN¥873.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥2.51b in cash, so it actually has CN¥1.18b net cash.

How Healthy Is Southern Publishing and MediaLtd's Balance Sheet?

We can see from the most recent balance sheet that Southern Publishing and MediaLtd had liabilities of CN¥6.79b falling due within a year, and liabilities of CN¥2.00b due beyond that. Offsetting this, it had CN¥2.51b in cash and CN¥3.18b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.11b.

Southern Publishing and MediaLtd has a market capitalization of CN¥13.2b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Southern Publishing and MediaLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Southern Publishing and MediaLtd has increased its EBIT by 7.3% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Southern Publishing and MediaLtd can strengthen its balance sheet over time. 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. Southern Publishing and MediaLtd 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. During the last three years, Southern Publishing and MediaLtd generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While Southern Publishing and MediaLtd does have more liabilities than liquid assets, it also has net cash of CN¥1.18b. The cherry on top was that in converted 85% of that EBIT to free cash flow, bringing in -CN¥154m. So is Southern Publishing and MediaLtd'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. For example - Southern Publishing and MediaLtd has 1 warning sign 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.