ZoomerMedia (CVE:ZUM) Seems To Use Debt Quite Sensibly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that ZoomerMedia Limited (CVE:ZUM) 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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ZoomerMedia

What Is ZoomerMedia's Debt?

As you can see below, at the end of February 2022, ZoomerMedia had CA$5.00m of debt, up from none a year ago. Click the image for more detail. But it also has CA$22.2m in cash to offset that, meaning it has CA$17.2m net cash.

How Strong Is ZoomerMedia's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ZoomerMedia had liabilities of CA$11.6m due within 12 months and liabilities of CA$27.2m due beyond that. Offsetting these obligations, it had cash of CA$22.2m as well as receivables valued at CA$10.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$6.54m.

Given ZoomerMedia has a market capitalization of CA$46.3m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 38% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While ZoomerMedia does have more liabilities than liquid assets, it also has net cash of CA$17.2m. And it impressed us with free cash flow of CA$6.9m, being 134% of its EBIT. So we are not troubled with ZoomerMedia's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - ZoomerMedia has 5 warning signs we think you should be aware of.

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.