Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Swift Media Limited (ASX:SW1) makes use of debt. 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. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Swift Media
What Is Swift Media's Debt?
As you can see below, Swift Media had AU$6.57m of debt at June 2021, down from AU$6.92m a year prior. However, it also had AU$3.88m in cash, and so its net debt is AU$2.69m.
How Healthy Is Swift Media's Balance Sheet?
According to the last reported balance sheet, Swift Media had liabilities of AU$7.50m due within 12 months, and liabilities of AU$6.64m due beyond 12 months. Offsetting this, it had AU$3.88m in cash and AU$2.85m in receivables that were due within 12 months. So it has liabilities totalling AU$7.41m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Swift Media has a market capitalization of AU$14.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Swift Media will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Swift Media made a loss at the EBIT level, and saw its revenue drop to AU$18m, which is a fall of 2.7%. That's not what we would hope to see.
Caveat Emptor
Over the last twelve months Swift Media produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping AU$1.5m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled AU$2.0m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. To that end, you should learn about the 3 warning signs we've spotted with Swift Media (including 1 which can't be ignored) .
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.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
About ASX:SW1
Swift Networks Group
Provides content and communications on television screens for out of home environments in Australia.
Low and slightly overvalued.
