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.' 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 can see that Changjiang Publishing & Media Co.,Ltd (SHSE:600757) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Changjiang Publishing & MediaLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Changjiang Publishing & MediaLtd had debt of CN¥307.6m, up from none in one year. But it also has CN¥3.57b in cash to offset that, meaning it has CN¥3.26b net cash.

A Look At Changjiang Publishing & MediaLtd's Liabilities

The latest balance sheet data shows that Changjiang Publishing & MediaLtd had liabilities of CN¥3.78b due within a year, and liabilities of CN¥159.0m falling due after that. Offsetting this, it had CN¥3.57b in cash and CN¥1.53b in receivables that were due within 12 months. So it actually has CN¥1.15b more liquid assets than total liabilities.

This surplus suggests that Changjiang Publishing & MediaLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Changjiang Publishing & MediaLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Changjiang Publishing & MediaLtd has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Changjiang Publishing & MediaLtd's earnings that will influence how the balance sheet holds up in the future. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Changjiang Publishing & MediaLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Changjiang Publishing & MediaLtd actually produced more free cash flow than EBIT over the last three years. 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 we empathize with investors who find debt concerning, you should keep in mind that Changjiang Publishing & MediaLtd has net cash of CN¥3.26b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥483m, being 136% of its EBIT. So we don't think Changjiang 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. For instance, we've identified 1 warning sign for Changjiang Publishing & MediaLtd that you should be aware of.

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.