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 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, Shandong Publishing&Media Co.,Ltd (SHSE:601019) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Shandong Publishing&MediaLtd Carry?
You can click the graphic below for the historical numbers, but it shows that Shandong Publishing&MediaLtd had CN¥18.0m of debt in September 2023, down from CN¥68.6m, one year before. But it also has CN¥8.80b in cash to offset that, meaning it has CN¥8.78b net cash.
A Look At Shandong Publishing&MediaLtd's Liabilities
We can see from the most recent balance sheet that Shandong Publishing&MediaLtd had liabilities of CN¥7.16b falling due within a year, and liabilities of CN¥1.27b due beyond that. Offsetting these obligations, it had cash of CN¥8.80b as well as receivables valued at CN¥2.34b due within 12 months. So it can boast CN¥2.70b more liquid assets than total liabilities.
This surplus suggests that Shandong Publishing&MediaLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shandong Publishing&MediaLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
Also good is that Shandong Publishing&MediaLtd grew its EBIT at 12% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Shandong Publishing&MediaLtd can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. Shandong Publishing&MediaLtd 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, Shandong Publishing&MediaLtd actually produced more free cash flow than EBIT. 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 Shandong Publishing&MediaLtd has CN¥8.78b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 112% of that EBIT to free cash flow, bringing in CN¥2.4b. So is Shandong Publishing&MediaLtd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Shandong Publishing&MediaLtd .
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.