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. As with many other companies Anhui Xinhua Media Co., Ltd. (SHSE:601801) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Anhui Xinhua Media Carry?

As you can see below, at the end of June 2024, Anhui Xinhua Media had CN¥1.39b of debt, up from CN¥1.05b a year ago. Click the image for more detail. But it also has CN¥11.9b in cash to offset that, meaning it has CN¥10.5b net cash.

A Look At Anhui Xinhua Media's Liabilities

According to the last reported balance sheet, Anhui Xinhua Media had liabilities of CN¥7.42b due within 12 months, and liabilities of CN¥857.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥11.9b as well as receivables valued at CN¥1.69b due within 12 months. So it can boast CN¥5.33b more liquid assets than total liabilities.

This surplus liquidity suggests that Anhui Xinhua Media's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Anhui Xinhua Media boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Anhui Xinhua Media has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Anhui Xinhua Media'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. While Anhui Xinhua Media 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, Anhui Xinhua Media 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 it is always sensible to investigate a company's debt, in this case Anhui Xinhua Media has CN¥10.5b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 152% of that EBIT to free cash flow, bringing in CN¥1.4b. The bottom line is that we do not find Anhui Xinhua Media's debt levels at all concerning. 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 example, we've discovered 1 warning sign for Anhui Xinhua Media 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.