Is Network Media Group (CVE:NTE) Using Debt Sensibly?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Network Media Group Inc. (CVE:NTE) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Network Media Group

How Much Debt Does Network Media Group Carry?

The image below, which you can click on for greater detail, shows that at February 2022 Network Media Group had debt of CA$2.77m, up from CA$1.20m in one year. However, because it has a cash reserve of CA$1.51m, its net debt is less, at about CA$1.26m.

How Strong Is Network Media Group's Balance Sheet?

The latest balance sheet data shows that Network Media Group had liabilities of CA$9.07m due within a year, and liabilities of CA$1.17m falling due after that. Offsetting this, it had CA$1.51m in cash and CA$1.97m in receivables that were due within 12 months. So it has liabilities totalling CA$6.77m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$7.13m, 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Network Media Group had a loss before interest and tax, and actually shrunk its revenue by 36%, to CA$3.7m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Network Media Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CA$3.1m 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. Another cause for caution is that is bled CA$3.0m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Case in point: We've spotted 5 warning signs for Network Media Group you should be aware of, and 3 of them don't sit too well with us.

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.