Would Macrolink Culturaltainment Development (SZSE:000620) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Macrolink Culturaltainment Development

What Is Macrolink Culturaltainment Development's Net Debt?

As you can see below, Macrolink Culturaltainment Development had CN¥2.10b of debt at September 2024, down from CN¥15.7b a year prior. On the flip side, it has CN¥927.3m in cash leading to net debt of about CN¥1.17b.

A Look At Macrolink Culturaltainment Development's Liabilities

According to the last reported balance sheet, Macrolink Culturaltainment Development had liabilities of CN¥5.87b due within 12 months, and liabilities of CN¥1.72b due beyond 12 months. Offsetting these obligations, it had cash of CN¥927.3m as well as receivables valued at CN¥584.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥6.08b.

This deficit isn't so bad because Macrolink Culturaltainment Development is worth CN¥11.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Macrolink Culturaltainment Development's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Macrolink Culturaltainment Development had a loss before interest and tax, and actually shrunk its revenue by 28%, to CN¥3.5b. That makes us nervous, to say the least.

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¥687m. 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. However, it doesn't help that it burned through CN¥202m of cash over the last year. So suffice it to say we do consider the stock to be 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. To that end, you should be aware of the 2 warning signs we've spotted with Macrolink Culturaltainment Development .

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.