Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 TianJin 712 Communication & Broadcasting Co., Ltd. (SHSE:603712) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does TianJin 712 Communication & Broadcasting Carry?

As you can see below, at the end of March 2024, TianJin 712 Communication & Broadcasting had CN¥1.12b of debt, up from CN¥766.5m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥1.35b in cash, so it actually has CN¥230.7m net cash.

A Look At TianJin 712 Communication & Broadcasting's Liabilities

We can see from the most recent balance sheet that TianJin 712 Communication & Broadcasting had liabilities of CN¥3.87b falling due within a year, and liabilities of CN¥850.8m due beyond that. Offsetting this, it had CN¥1.35b in cash and CN¥3.91b in receivables that were due within 12 months. So it can boast CN¥542.7m more liquid assets than total liabilities.

This surplus suggests that TianJin 712 Communication & Broadcasting has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, TianJin 712 Communication & Broadcasting boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that TianJin 712 Communication & Broadcasting's load is not too heavy, because its EBIT was down 53% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 TianJin 712 Communication & Broadcasting'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. TianJin 712 Communication & Broadcasting 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, TianJin 712 Communication & Broadcasting burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case TianJin 712 Communication & Broadcasting has CN¥230.7m in net cash and a decent-looking balance sheet. So while TianJin 712 Communication & Broadcasting does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with TianJin 712 Communication & Broadcasting .

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.