These 4 Measures Indicate That ZoomerMedia (CVE:ZUM) Is Using Debt Reasonably Well

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. As with many other companies ZoomerMedia Limited (CVE:ZUM) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for ZoomerMedia

What Is ZoomerMedia's Debt?

The image below, which you can click on for greater detail, shows that at August 2022 ZoomerMedia had debt of CA$5.00m, up from none in one year. However, it does have CA$20.9m in cash offsetting this, leading to net cash of CA$15.9m.

How Strong Is ZoomerMedia's Balance Sheet?

The latest balance sheet data shows that ZoomerMedia had liabilities of CA$11.5m due within a year, and liabilities of CA$28.2m falling due after that. Offsetting these obligations, it had cash of CA$20.9m as well as receivables valued at CA$11.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$7.77m.

This deficit isn't so bad because ZoomerMedia is worth CA$29.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, ZoomerMedia boasts net cash, so it's fair to say it does not have a heavy debt load!

Unfortunately, ZoomerMedia saw its EBIT slide 6.2% in the last twelve months. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. 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 ZoomerMedia will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. ZoomerMedia may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, ZoomerMedia actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While ZoomerMedia does have more liabilities than liquid assets, it also has net cash of CA$15.9m. And it impressed us with free cash flow of CA$2.8m, being 123% of its EBIT. So we are not troubled with ZoomerMedia's debt use. 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. Be aware that ZoomerMedia is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.