Is OverActive Media (CVE:OAM) Using Debt Sensibly?

Warren Buffett famously said, '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. We can see that OverActive Media Corp. (CVE:OAM) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for OverActive Media

What Is OverActive Media's Debt?

As you can see below, at the end of September 2023, OverActive Media had CA$28.3m of debt, up from CA$26.3m a year ago. Click the image for more detail. However, it does have CA$9.70m in cash offsetting this, leading to net debt of about CA$18.6m.

How Healthy Is OverActive Media's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that OverActive Media had liabilities of CA$20.4m due within 12 months and liabilities of CA$24.0m due beyond that. Offsetting this, it had CA$9.70m in cash and CA$3.79m in receivables that were due within 12 months. So it has liabilities totalling CA$30.9m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$18.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, OverActive Media would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine OverActive Media's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year OverActive Media's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, OverActive Media had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$11m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CA$4.9m in negative free cash flow over the last year. That means it's on the risky side of things. 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. We've identified 3 warning signs with OverActive Media (at least 2 which can't be ignored) , 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.