Would OverActive Media (CVE:OAM) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that OverActive Media Corp. (CVE:OAM) does use debt in its business. But should shareholders be worried about its use of debt?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. 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

What Is OverActive Media's Net Debt?

The image below, which you can click on for greater detail, shows that OverActive Media had debt of CA$24.5m at the end of March 2024, a reduction from CA$25.9m over a year. However, it does have CA$10.1m in cash offsetting this, leading to net debt of about CA$14.5m.

A Look At OverActive Media's Liabilities

According to the last reported balance sheet, OverActive Media had liabilities of CA$15.3m due within 12 months, and liabilities of CA$25.3m due beyond 12 months. Offsetting these obligations, it had cash of CA$10.1m as well as receivables valued at CA$6.85m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$23.6m.

This deficit is considerable relative to its market capitalization of CA$33.8m, so it does suggest shareholders should keep an eye on OverActive Media's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is OverActive Media'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 OverActive Media wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to CA$18m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, OverActive Media still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$6.9m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$7.6m of cash over the last year. So suffice it to say we consider the stock very risky. 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 OverActive Media (2 are concerning!) 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.

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