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.' 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 Jiangsu Phoenix Publishing & Media Corporation Limited (SHSE:601928) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Jiangsu Phoenix Publishing & Media Carry?

As you can see below, Jiangsu Phoenix Publishing & Media had CN¥117.0m of debt at September 2024, down from CN¥151.3m a year prior. But it also has CN¥3.87b in cash to offset that, meaning it has CN¥3.76b net cash.

A Look At Jiangsu Phoenix Publishing & Media's Liabilities

The latest balance sheet data shows that Jiangsu Phoenix Publishing & Media had liabilities of CN¥10.7b due within a year, and liabilities of CN¥1.29b falling due after that. Offsetting this, it had CN¥3.87b in cash and CN¥1.11b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥6.98b.

This deficit isn't so bad because Jiangsu Phoenix Publishing & Media is worth CN¥29.2b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Jiangsu Phoenix Publishing & Media 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 Jiangsu Phoenix Publishing & Media saw its EBIT decline by 6.5% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jiangsu Phoenix Publishing & 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. Jiangsu Phoenix 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. Over the last three years, Jiangsu Phoenix Publishing & Media actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Jiangsu Phoenix Publishing & Media does have more liabilities than liquid assets, it also has net cash of CN¥3.76b. And it impressed us with free cash flow of CN¥831m, being 132% of its EBIT. So we don't have any problem with Jiangsu Phoenix Publishing & Media's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Jiangsu Phoenix Publishing & Media (including 1 which doesn't sit too well with us) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.