Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Anhui Xinhua Media Co., Ltd. (SHSE:601801) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Anhui Xinhua Media's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Anhui Xinhua Media had CN¥1.15b of debt, an increase on CN¥422.6m, over one year. But it also has CN¥10.5b in cash to offset that, meaning it has CN¥9.39b net cash.

A Look At Anhui Xinhua Media's Liabilities

According to the last reported balance sheet, Anhui Xinhua Media had liabilities of CN¥6.66b due within 12 months, and liabilities of CN¥880.0m due beyond 12 months. On the other hand, it had cash of CN¥10.5b and CN¥2.50b worth of receivables due within a year. So it can boast CN¥5.50b more liquid assets than total liabilities.

This excess liquidity is a great indication that Anhui Xinhua Media's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Anhui Xinhua Media has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Anhui Xinhua Media saw its EBIT drop by 2.5% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Anhui Xinhua Media 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. Anhui Xinhua Media 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. Happily for any shareholders, Anhui Xinhua Media actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Anhui Xinhua Media has CN¥9.39b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.4b, being 165% of its EBIT. So is Anhui Xinhua Media's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Anhui Xinhua Media, you may well want to click here to check an interactive graph of its earnings per share history.

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.