Is Media and Games Invest (ETR:M8G) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Media and Games Invest plc (ETR:M8G) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Media and Games Invest

What Is Media and Games Invest's Net Debt?

As you can see below, Media and Games Invest had €5.18m of debt at September 2020, down from €64.0m a year prior. But on the other hand it also has €10.9m in cash, leading to a €5.75m net cash position.

How Healthy Is Media and Games Invest's Balance Sheet?

According to the last reported balance sheet, Media and Games Invest had liabilities of €53.6m due within 12 months, and liabilities of €111.7m due beyond 12 months. Offsetting this, it had €10.9m in cash and €25.0m in receivables that were due within 12 months. So its liabilities total €129.4m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of €134.9m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Media and Games Invest boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Media and Games Invest improved its EBIT from a last year's loss to a positive €4.6m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Media and Games Invest's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Media and Games Invest 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. Over the last year, Media and Games Invest actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Media and Games Invest does have more liabilities than liquid assets, it also has net cash of €5.75m. And it impressed us with free cash flow of €9.1m, being 198% of its EBIT. So although we see some areas for improvement, we're not too worried about Media and Games Invest's balance sheet. 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. Be aware that Media and Games Invest 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.

If you’re looking to trade Media and Games Invest, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.