Merit InteractiveLtd (SZSE:300766) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Merit Interactive Co.,Ltd. (SZSE:300766) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Merit InteractiveLtd

What Is Merit InteractiveLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Merit InteractiveLtd had CN¥170.4m of debt, an increase on CN¥156.8m, over one year. But on the other hand it also has CN¥831.4m in cash, leading to a CN¥661.0m net cash position.

How Healthy Is Merit InteractiveLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Merit InteractiveLtd had liabilities of CN¥234.9m due within 12 months and liabilities of CN¥97.1m due beyond that. On the other hand, it had cash of CN¥831.4m and CN¥164.3m worth of receivables due within a year. So it actually has CN¥663.7m more liquid assets than total liabilities.

This surplus suggests that Merit InteractiveLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Merit InteractiveLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Merit InteractiveLtd'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.

In the last year Merit InteractiveLtd had a loss before interest and tax, and actually shrunk its revenue by 20%, to CN¥448m. That makes us nervous, to say the least.

So How Risky Is Merit InteractiveLtd?

Although Merit InteractiveLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥5.9m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Merit InteractiveLtd is showing 3 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.