Warren Buffett famously said, '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. We note that Shandong Publishing&Media Co.,Ltd (SHSE:601019) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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. 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, 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.
View our latest analysis for Shandong Publishing&MediaLtd
How Much Debt Does Shandong Publishing&MediaLtd Carry?
You can click the graphic below for the historical numbers, but it shows that Shandong Publishing&MediaLtd had CN¥48.6m of debt in June 2023, down from CN¥51.7m, one year before. But it also has CN¥9.60b in cash to offset that, meaning it has CN¥9.55b net cash.
A Look At Shandong Publishing&MediaLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that Shandong Publishing&MediaLtd had liabilities of CN¥5.72b due within 12 months and liabilities of CN¥1.29b due beyond that. Offsetting this, it had CN¥9.60b in cash and CN¥2.15b in receivables that were due within 12 months. So it actually has CN¥4.74b more liquid assets than total liabilities.
This excess liquidity suggests that Shandong Publishing&MediaLtd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Shandong Publishing&MediaLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Shandong Publishing&MediaLtd grew its EBIT by 5.4% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shandong Publishing&MediaLtd's ability to maintain a healthy balance sheet going forward. 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. Shandong Publishing&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. Over the last three years, Shandong Publishing&MediaLtd actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
While it is always sensible to investigate a company's debt, in this case Shandong Publishing&MediaLtd has CN¥9.55b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in CN¥2.0b. So we don't think Shandong Publishing&MediaLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Shandong Publishing&MediaLtd , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.