ZoomerMedia (CVE:ZUM) Has A Somewhat Strained Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that ZoomerMedia Limited (CVE:ZUM) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ZoomerMedia

What Is ZoomerMedia's Debt?

As you can see below, at the end of May 2023, ZoomerMedia had CA$12.4m of debt, up from CA$5.00m a year ago. Click the image for more detail. However, it does have CA$13.8m in cash offsetting this, leading to net cash of CA$1.43m.

How Healthy Is ZoomerMedia's Balance Sheet?

We can see from the most recent balance sheet that ZoomerMedia had liabilities of CA$9.51m falling due within a year, and liabilities of CA$35.1m due beyond that. Offsetting this, it had CA$13.8m in cash and CA$11.6m in receivables that were due within 12 months. So its liabilities total CA$19.2m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CA$27.0m, so it does suggest shareholders should keep an eye on ZoomerMedia's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, ZoomerMedia also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, ZoomerMedia's EBIT fell a jaw-dropping 64% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since ZoomerMedia will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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. Happily for any shareholders, ZoomerMedia actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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$1.43m. The cherry on top was that in converted 119% of that EBIT to free cash flow, bringing in CA$3.0m. So although we see some areas for improvement, we're not too worried about ZoomerMedia's balance sheet. 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 ZoomerMedia (2 shouldn't be ignored!) that you should be aware of before investing here.

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.