Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Northern United Publishing & Media (Group) Company Limited (SHSE:601999) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Northern United Publishing & Media (Group)'s Net Debt?
As you can see below, Northern United Publishing & Media (Group) had CN¥60.0m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥970.0m in cash to offset that, meaning it has CN¥910.0m net cash.
How Healthy Is Northern United Publishing & Media (Group)'s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Northern United Publishing & Media (Group) had liabilities of CN¥1.60b due within 12 months and liabilities of CN¥243.6m due beyond that. Offsetting this, it had CN¥970.0m in cash and CN¥856.4m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
This state of affairs indicates that Northern United Publishing & Media (Group)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥3.88b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Northern United Publishing & Media (Group) also has more cash than debt, so we're pretty confident it can manage its debt safely.
Although Northern United Publishing & Media (Group) made a loss at the EBIT level, last year, it was also good to see that it generated CN¥1.1m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Northern United Publishing & Media (Group) 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Northern United Publishing & Media (Group) 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, Northern United Publishing & Media (Group) actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
We could understand if investors are concerned about Northern United Publishing & Media (Group)'s liabilities, but we can be reassured by the fact it has has net cash of CN¥910.0m. The cherry on top was that in converted 18,443% of that EBIT to free cash flow, bringing in CN¥203m. So is Northern United Publishing & Media (Group)'s debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Northern United Publishing & Media (Group) (1 is potentially serious!) that you should be aware of before investing here.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.