Is Network Media Group (CVE:NTE) Using Debt In A Risky Way?

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. We can see that Network Media Group Inc. (CVE:NTE) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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.

See our latest analysis for Network Media Group

What Is Network Media Group's Debt?

As you can see below, at the end of November 2021, Network Media Group had CA$1.98m of debt, up from CA$1.44m a year ago. Click the image for more detail. But it also has CA$2.79m in cash to offset that, meaning it has CA$812.1k net cash.

How Strong Is Network Media Group's Balance Sheet?

We can see from the most recent balance sheet that Network Media Group had liabilities of CA$7.75m falling due within a year, and liabilities of CA$1.33m due beyond that. Offsetting this, it had CA$2.79m in cash and CA$1.91m in receivables that were due within 12 months. So it has liabilities totalling CA$4.39m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Network Media Group is worth CA$12.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Network Media Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Network Media Group's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Network Media Group made a loss at the EBIT level, and saw its revenue drop to CA$3.5m, which is a fall of 64%. That makes us nervous, to say the least.

So How Risky Is Network Media Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Network Media Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$298k and booked a CA$2.5m accounting loss. Given it only has net cash of CA$812.1k, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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, we've discovered 4 warning signs for Network Media Group (1 is potentially serious!) that you should be aware of before investing here.

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.