Macrolink Culturaltainment Development (SZSE:000620) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Macrolink Culturaltainment Development Co., Ltd. (SZSE:000620) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Macrolink Culturaltainment Development

What Is Macrolink Culturaltainment Development's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Macrolink Culturaltainment Development had CN¥2.02b of debt in December 2023, down from CN¥18.8b, one year before. However, because it has a cash reserve of CN¥1.11b, its net debt is less, at about CN¥907.1m.

How Strong Is Macrolink Culturaltainment Development's Balance Sheet?

According to the last reported balance sheet, Macrolink Culturaltainment Development had liabilities of CN¥7.10b due within 12 months, and liabilities of CN¥1.70b due beyond 12 months. Offsetting this, it had CN¥1.11b in cash and CN¥607.2m in receivables that were due within 12 months. So it has liabilities totalling CN¥7.07b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥10.1b, so it does suggest shareholders should keep an eye on Macrolink Culturaltainment Development's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Macrolink Culturaltainment Development'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.

In the last year Macrolink Culturaltainment Development had a loss before interest and tax, and actually shrunk its revenue by 27%, to CN¥3.9b. That makes us nervous, to say the least.

Caveat Emptor

While Macrolink Culturaltainment Development's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥803m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥463m and the profit of CN¥352m. So one might argue that there's still a chance it can get things on the right track. 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. Be aware that Macrolink Culturaltainment Development is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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.