David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Wasu Media Holding Co.,Ltd (SZSE:000156) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Wasu Media HoldingLtd Carry?

As you can see below, at the end of September 2024, Wasu Media HoldingLtd had CN¥1.65b of debt, up from CN¥1.26b a year ago. Click the image for more detail. However, it does have CN¥5.84b in cash offsetting this, leading to net cash of CN¥4.19b.

A Look At Wasu Media HoldingLtd's Liabilities

According to the last reported balance sheet, Wasu Media HoldingLtd had liabilities of CN¥9.92b due within 12 months, and liabilities of CN¥3.30b due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.84b as well as receivables valued at CN¥3.80b due within 12 months. So it has liabilities totalling CN¥3.58b more than its cash and near-term receivables, combined.

Wasu Media HoldingLtd has a market capitalization of CN¥15.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Wasu Media HoldingLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Wasu Media HoldingLtd saw its EBIT decline by 8.7% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Wasu Media HoldingLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Wasu Media HoldingLtd 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, Wasu Media HoldingLtd generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although Wasu Media HoldingLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥4.19b. And it impressed us with free cash flow of CN¥636m, being 94% of its EBIT. So we are not troubled with Wasu Media HoldingLtd's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Wasu Media HoldingLtd (of which 1 is concerning!) 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.