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.' 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 note that ZoomerMedia Limited (CVE:ZUM) does have debt on its balance sheet. 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. 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.
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How Much Debt Does ZoomerMedia Carry?
The image below, which you can click on for greater detail, shows that at February 2024 ZoomerMedia had debt of CA$19.5m, up from CA$12.5m in one year. However, it also had CA$5.54m in cash, and so its net debt is CA$13.9m.
A Look At ZoomerMedia's Liabilities
Zooming in on the latest balance sheet data, we can see that ZoomerMedia had liabilities of CA$22.1m due within 12 months and liabilities of CA$34.8m due beyond that. Offsetting this, it had CA$5.54m in cash and CA$12.7m in receivables that were due within 12 months. So its liabilities total CA$38.7m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the CA$20.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, ZoomerMedia would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is ZoomerMedia'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 ZoomerMedia wasn't profitable at an EBIT level, but managed to grow its revenue by 3.1%, to CA$62m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, ZoomerMedia had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CA$353k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CA$2.4m. And until that time we think this is a risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for ZoomerMedia (of which 2 shouldn't be ignored!) you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
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About TSXV:ZUM
Slight unattractive dividend payer.