We Think ZoomerMedia (CVE:ZUM) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that ZoomerMedia Limited (CVE:ZUM) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ZoomerMedia

What Is ZoomerMedia's Net Debt?

The image below, which you can click on for greater detail, shows that at November 2022 ZoomerMedia had debt of CA$13.1m, up from none in one year. However, it does have CA$15.5m in cash offsetting this, leading to net cash of CA$2.35m.

How Strong Is ZoomerMedia's Balance Sheet?

According to the last reported balance sheet, ZoomerMedia had liabilities of CA$14.4m due within 12 months, and liabilities of CA$36.1m due beyond 12 months. Offsetting these obligations, it had cash of CA$15.5m as well as receivables valued at CA$15.7m due within 12 months. So it has liabilities totalling CA$19.4m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CA$29.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, ZoomerMedia boasts net cash, so it's fair to say it does not have a heavy debt load!

The bad news is that ZoomerMedia saw its EBIT decline by 13% over the last year. If earnings continue to decline at that rate then handling the debt will be more difficult than taking three children under 5 to a fancy pants restaurant. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While ZoomerMedia has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, ZoomerMedia actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although ZoomerMedia's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CA$2.35m. And it impressed us with free cash flow of CA$3.4m, being 118% 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. For example - ZoomerMedia has 3 warning signs we think you should be aware of.

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.