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.' 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 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, 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 think about a company's use of debt, we first look at cash and debt together.

See 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 May 2022 ZoomerMedia had debt of CA$5.00m, up from none in one year. But it also has CA$21.5m in cash to offset that, meaning it has CA$16.5m net cash.

How Strong Is ZoomerMedia's Balance Sheet?

We can see from the most recent balance sheet that ZoomerMedia had liabilities of CA$11.0m falling due within a year, and liabilities of CA$26.9m due beyond that. Offsetting these obligations, it had cash of CA$21.5m as well as receivables valued at CA$11.5m due within 12 months. So its liabilities total CA$4.91m more than the combination of its cash and short-term receivables.

Given ZoomerMedia has a market capitalization of CA$33.1m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, ZoomerMedia boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly ZoomerMedia's EBIT was essentially flat over the last twelve months. Ideally it can diminish its debt load by kick-starting earnings growth. When analysing debt levels, the balance sheet is the obvious place to start. 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, 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$16.5m. And it impressed us with free cash flow of CA$4.8m, being 127% of its EBIT. So we don't have any problem with ZoomerMedia's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for ZoomerMedia that you should be aware of before investing here.

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.