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.' 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 can see that Zhejiang Publishing & Media Co., Ltd. (SHSE:601921) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Zhejiang Publishing & Media's Net Debt?
As you can see below, Zhejiang Publishing & Media had CN¥20.5m of debt at March 2024, down from CN¥38.5m a year prior. However, it does have CN¥12.5b in cash offsetting this, leading to net cash of CN¥12.5b.
How Healthy Is Zhejiang Publishing & Media's Balance Sheet?
The latest balance sheet data shows that Zhejiang Publishing & Media had liabilities of CN¥8.85b due within a year, and liabilities of CN¥427.0m falling due after that. Offsetting these obligations, it had cash of CN¥12.5b as well as receivables valued at CN¥1.43b due within 12 months. So it can boast CN¥4.66b more liquid assets than total liabilities.
It's good to see that Zhejiang Publishing & Media has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Zhejiang Publishing & Media has more cash than debt is arguably a good indication that it can manage its debt safely.
On the other hand, Zhejiang Publishing & Media's EBIT dived 18%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Zhejiang Publishing & Media can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Zhejiang Publishing & 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. Happily for any shareholders, Zhejiang Publishing & Media actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While it is always sensible to investigate a company's debt, in this case Zhejiang Publishing & Media has CN¥12.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.2b, being 159% of its EBIT. So we don't think Zhejiang Publishing & Media's use of debt is risky. 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. For example, we've discovered 3 warning signs for Zhejiang Publishing & Media (2 shouldn't be ignored!) that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.