We Think Macrolink Culturaltainment Development (SZSE:000620) Has A Fair Chunk Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Macrolink Culturaltainment Development Co., Ltd. (SZSE:000620) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. 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 Macrolink Culturaltainment Development

What Is Macrolink Culturaltainment Development's Net Debt?

The image below, which you can click on for greater detail, shows that Macrolink Culturaltainment Development had debt of CN¥2.07b at the end of June 2024, a reduction from CN¥15.8b over a year. However, it also had CN¥948.7m in cash, and so its net debt is CN¥1.12b.

How Strong Is Macrolink Culturaltainment Development's Balance Sheet?

According to the last reported balance sheet, Macrolink Culturaltainment Development had liabilities of CN¥6.11b due within 12 months, and liabilities of CN¥1.70b due beyond 12 months. Offsetting these obligations, it had cash of CN¥948.7m as well as receivables valued at CN¥562.6m due within 12 months. So it has liabilities totalling CN¥6.30b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥8.28b, so it does suggest shareholders should keep an eye on Macrolink Culturaltainment Development's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Macrolink Culturaltainment Development made a loss at the EBIT level, and saw its revenue drop to CN¥3.7b, which is a fall of 23%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Macrolink Culturaltainment Development's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥371m. 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. Another cause for caution is that is bled CN¥30m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Macrolink Culturaltainment Development has 1 warning sign we think you should be aware of.

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.