Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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. As with many other companies Meitu, Inc. (HKG:1357) makes use of debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Meitu’s Debt?
The image below, which you can click on for greater detail, shows that at December 2018 Meitu had debt of CN¥10.0m, up from none in one year. But it also has CN¥2.69b in cash to offset that, meaning it has CN¥2.68b net cash.
How Strong Is Meitu’s Balance Sheet?
The latest balance sheet data shows that Meitu had liabilities of CN¥978.9m due within a year, and liabilities of CN¥150.1m falling due after that. Offsetting this, it had CN¥2.69b in cash and CN¥1.00b in receivables that were due within 12 months. So it can boast CN¥2.56b more liquid assets than total liabilities.
This excess liquidity is a great indication that Meitu’s balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Meitu boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Meitu can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Meitu saw its revenue drop to CN¥2.8b, which is a fall of 38%. That makes us nervous, to say the least.
So How Risky Is Meitu?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Meitu lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥2.2b of cash and made a loss of CN¥1.1b. However, it has net cash of CN¥2.7b, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Meitu insider transactions.
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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