Health Check: How Prudently Does Network Media Group (CVE:NTE) Use Debt?

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 Network Media Group Inc. (CVE:NTE) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

See our latest analysis for Network Media Group

What Is Network Media Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Network Media Group had CA$2.99m of debt in August 2023, down from CA$3.83m, one year before. On the flip side, it has CA$991.8k in cash leading to net debt of about CA$2.00m.

A Look At Network Media Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Network Media Group had liabilities of CA$8.45m due within 12 months and liabilities of CA$659.7k due beyond that. On the other hand, it had cash of CA$991.8k and CA$4.02m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$4.10m.

This deficit is considerable relative to its market capitalization of CA$4.19m, so it does suggest shareholders should keep an eye on Network Media Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Network Media Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Network Media Group had a loss before interest and tax, and actually shrunk its revenue by 32%, to CA$7.7m. To be frank that doesn't bode well.

Caveat Emptor

While Network Media Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CA$343k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CA$581k. In the meantime, we consider the stock very risky. 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. For example, we've discovered 3 warning signs for Network Media Group (2 are potentially serious!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.