Does OverActive Media (CVE:OAM) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, OverActive Media Corp. (CVE:OAM) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 OverActive Media

How Much Debt Does OverActive Media Carry?

The image below, which you can click on for greater detail, shows that OverActive Media had debt of CA$2.78m at the end of September 2024, a reduction from CA$28.3m over a year. But it also has CA$8.86m in cash to offset that, meaning it has CA$6.08m net cash.

How Strong Is OverActive Media's Balance Sheet?

According to the last reported balance sheet, OverActive Media had liabilities of CA$9.37m due within 12 months, and liabilities of CA$8.81m due beyond 12 months. Offsetting these obligations, it had cash of CA$8.86m as well as receivables valued at CA$8.09m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$1.23m.

Given OverActive Media has a market capitalization of CA$35.2m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, OverActive Media also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 OverActive 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, OverActive Media reported revenue of CA$21m, which is a gain of 39%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is OverActive Media?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months OverActive Media lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$10m of cash and made a loss of CA$1.1m. Given it only has net cash of CA$6.08m, the company may need to raise more capital if it doesn't reach break-even soon. OverActive Media's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. We've identified 5 warning signs with OverActive Media (at least 3 which are concerning) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.