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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Chinese Universe Publishing and Media Group Co., Ltd. (SHSE:600373) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Chinese Universe Publishing and Media Group Carry?

As you can see below, Chinese Universe Publishing and Media Group had CN¥3.69b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥19.3b in cash, so it actually has CN¥15.7b net cash.

A Look At Chinese Universe Publishing and Media Group's Liabilities

According to the last reported balance sheet, Chinese Universe Publishing and Media Group had liabilities of CN¥12.8b due within 12 months, and liabilities of CN¥1.15b due beyond 12 months. On the other hand, it had cash of CN¥19.3b and CN¥1.65b worth of receivables due within a year. So it actually has CN¥7.05b more liquid assets than total liabilities.

This surplus strongly suggests that Chinese Universe Publishing and Media Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Chinese Universe Publishing and Media Group has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Chinese Universe Publishing and Media Group has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. 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 Chinese Universe Publishing and Media Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Chinese Universe Publishing and Media Group 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, Chinese Universe Publishing and Media Group 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 we empathize with investors who find debt concerning, you should keep in mind that Chinese Universe Publishing and Media Group has net cash of CN¥15.7b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.0b, being 137% of its EBIT. When it comes to Chinese Universe Publishing and Media Group's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. We've identified 1 warning sign with Chinese Universe Publishing and Media Group , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.