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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Citic Press Corporation (SZSE:300788) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Citic Press

What Is Citic Press's Debt?

As you can see below, at the end of September 2023, Citic Press had CN¥55.4m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥1.62b in cash to offset that, meaning it has CN¥1.56b net cash.

How Healthy Is Citic Press' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Citic Press had liabilities of CN¥993.0m due within 12 months and liabilities of CN¥189.6m due beyond that. On the other hand, it had cash of CN¥1.62b and CN¥151.8m worth of receivables due within a year. So it can boast CN¥589.5m 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!

Also good is that Citic Press grew its EBIT at 14% over the last year, further increasing its ability to manage 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 Citic Press'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.

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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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. And it impressed us with free cash flow of CN¥181m, being 135% of its EBIT. So we don't think Citic Press's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Citic Press (1 is a bit concerning!) 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.