David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Wasu Media Holding Co.,Ltd (SZSE:000156) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Wasu Media HoldingLtd's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2023 Wasu Media HoldingLtd had debt of CN¥2.14b, up from CN¥942.8m in one year. However, it does have CN¥7.16b in cash offsetting this, leading to net cash of CN¥5.02b.
How Strong Is Wasu Media HoldingLtd's Balance Sheet?
The latest balance sheet data shows that Wasu Media HoldingLtd had liabilities of CN¥10.7b due within a year, and liabilities of CN¥3.39b falling due after that. Offsetting this, it had CN¥7.16b in cash and CN¥3.42b in receivables that were due within 12 months. So it has liabilities totalling CN¥3.49b more than its cash and near-term receivables, combined.
This deficit isn't so bad because Wasu Media HoldingLtd is worth CN¥14.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Wasu Media HoldingLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.
But the bad news is that Wasu Media HoldingLtd has seen its EBIT plunge 12% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Wasu Media HoldingLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Wasu Media HoldingLtd 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. During the last three years, Wasu Media HoldingLtd produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
While Wasu Media HoldingLtd does have more liabilities than liquid assets, it also has net cash of CN¥5.02b. And it impressed us with free cash flow of CN¥324m, being 78% of its EBIT. So we are not troubled with Wasu Media HoldingLtd's debt use. 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. For example - Wasu Media HoldingLtd has 1 warning sign we think you should be aware of.
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.