Is Mango Excellent Media (SZSE:300413) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Mango Excellent Media Co., Ltd. (SZSE:300413) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Mango Excellent Media

What Is Mango Excellent Media's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Mango Excellent Media had CN¥115.8m of debt in March 2024, down from CN¥1.38b, one year before. However, its balance sheet shows it holds CN¥13.0b in cash, so it actually has CN¥12.9b net cash.

How Strong Is Mango Excellent Media's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mango Excellent Media had liabilities of CN¥9.74b due within 12 months and liabilities of CN¥205.2m due beyond that. Offsetting this, it had CN¥13.0b in cash and CN¥5.04b in receivables that were due within 12 months. So it actually has CN¥8.13b more liquid assets than total liabilities.

This excess liquidity suggests that Mango Excellent Media is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Mango Excellent Media boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Mango Excellent Media grew its EBIT at 13% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Mango Excellent Media's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Mango Excellent Media 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. Looking at the most recent three years, Mango Excellent Media recorded free cash flow of 30% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Mango Excellent Media has CN¥12.9b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 13% in the last twelve months. So we don't think Mango Excellent Media's use of debt is risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Mango Excellent Media .

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.