Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 China Television Media, Ltd. (SHSE:600088) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is China Television Media's Debt?

As you can see below, at the end of December 2023, China Television Media had CN¥14.1m of debt, up from none a year ago. Click the image for more detail. However, it does have CN¥620.4m in cash offsetting this, leading to net cash of CN¥606.4m.

How Strong Is China Television Media's Balance Sheet?

According to the last reported balance sheet, China Television Media had liabilities of CN¥304.9m due within 12 months, and liabilities of CN¥100.0m due beyond 12 months. Offsetting this, it had CN¥620.4m in cash and CN¥104.3m in receivables that were due within 12 months. So it can boast CN¥319.8m more liquid assets than total liabilities.

This surplus suggests that China Television Media has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that China Television Media has more cash than debt is arguably a good indication that it can manage its debt safely.

Although China Television Media made a loss at the EBIT level, last year, it was also good to see that it generated CN¥45m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since China Television Media will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. China Television 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. Over the last year, China Television Media reported free cash flow worth 16% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Television Media has CN¥606.4m in net cash and a decent-looking balance sheet. So we are not troubled with China Television Media's debt use. 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. Be aware that China Television Media is showing 1 warning sign in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com