Is NetMedia Group société anonyme (EPA:ALNMG) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that NetMedia Group société anonyme (EPA:ALNMG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for NetMedia Group société anonyme

What Is NetMedia Group société anonyme's Net Debt?

You can click the graphic below for the historical numbers, but it shows that NetMedia Group société anonyme had €4.66m of debt in December 2023, down from €6.37m, one year before. However, it also had €2.48m in cash, and so its net debt is €2.18m.

How Strong Is NetMedia Group société anonyme's Balance Sheet?

According to the last reported balance sheet, NetMedia Group société anonyme had liabilities of €20.0m due within 12 months, and liabilities of €793.0k due beyond 12 months. Offsetting these obligations, it had cash of €2.48m as well as receivables valued at €10.2m due within 12 months. So its liabilities total €8.19m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of €9.50m, so it does suggest shareholders should keep an eye on NetMedia Group société anonyme's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is NetMedia Group société anonyme'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, NetMedia Group société anonyme reported revenue of €24m, which is a gain of 157%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Despite the top line growth, NetMedia Group société anonyme still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €1.9m. 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 €3.2m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for NetMedia Group société anonyme (of which 3 are concerning!) you should know about.

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.