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 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. Importantly, Citic Press Corporation (SZSE:300788) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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 Citic Press's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Citic Press had debt of CN¥52.0m, up from none in one year. However, it does have CN¥1.62b in cash offsetting this, leading to net cash of CN¥1.56b.

A Look At Citic Press' Liabilities

Zooming in on the latest balance sheet data, we can see that Citic Press had liabilities of CN¥940.5m due within 12 months and liabilities of CN¥133.6m due beyond that. Offsetting these obligations, it had cash of CN¥1.62b as well as receivables valued at CN¥115.8m due within 12 months. So it can boast CN¥658.5m more liquid assets than total liabilities.

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

But the other side of the story is that Citic Press saw its EBIT decline by 4.0% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Citic Press'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Citic Press 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, Citic Press 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 Citic Press has CN¥1.56b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 109% of that EBIT to free cash flow, bringing in CN¥111m. So is Citic Press's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Citic Press you should be aware of, and 1 of them shouldn't be ignored.

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.