Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, TianJin 712 Communication & Broadcasting Co., Ltd. (SHSE:603712) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is TianJin 712 Communication & Broadcasting's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 TianJin 712 Communication & Broadcasting had CN¥1.12b of debt, an increase on CN¥766.5m, over one year. But on the other hand it also has CN¥1.35b in cash, leading to a CN¥230.7m net cash position.

A Look At TianJin 712 Communication & Broadcasting's Liabilities

The latest balance sheet data shows that TianJin 712 Communication & Broadcasting had liabilities of CN¥3.87b due within a year, and liabilities of CN¥850.8m falling due after that. Offsetting these obligations, it had cash of CN¥1.35b as well as receivables valued at CN¥3.91b due within 12 months. So it can boast CN¥542.7m more liquid assets than total liabilities.

This surplus suggests that TianJin 712 Communication & Broadcasting has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, TianJin 712 Communication & Broadcasting boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact TianJin 712 Communication & Broadcasting's saving grace is its low debt levels, because its EBIT has tanked 53% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 TianJin 712 Communication & Broadcasting 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 company can only pay off debt with cold hard cash, not accounting profits. While TianJin 712 Communication & Broadcasting 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. Over the last three years, TianJin 712 Communication & Broadcasting saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case TianJin 712 Communication & Broadcasting has CN¥230.7m in net cash and a decent-looking balance sheet. So while TianJin 712 Communication & Broadcasting does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for TianJin 712 Communication & Broadcasting you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.