Is Network Media Group (CVE:NTE) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Network Media Group Inc. (CVE:NTE) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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.

Check out our latest analysis for Network Media Group

What Is Network Media Group's Debt?

The image below, which you can click on for greater detail, shows that Network Media Group had debt of CA$2.37m at the end of May 2024, a reduction from CA$2.68m over a year. But on the other hand it also has CA$3.05m in cash, leading to a CA$681.1k net cash position.

How Healthy Is Network Media Group's Balance Sheet?

The latest balance sheet data shows that Network Media Group had liabilities of CA$9.16m due within a year, and liabilities of CA$469.1k falling due after that. Offsetting these obligations, it had cash of CA$3.05m as well as receivables valued at CA$2.06m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$4.51m.

This deficit is considerable relative to its market capitalization of CA$5.17m, 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. Despite its noteworthy liabilities, Network Media Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 37%, to CA$9.2m. To be frank that doesn't bode well.

So How Risky Is Network Media Group?

Although Network Media Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CA$3.8m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Network Media Group is showing 3 warning signs in our investment analysis , and 2 of those are significant...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com