Here's Why Groupe MEDIA 6 (EPA:EDI) Has A Meaningful Debt Burden

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 Groupe MEDIA 6 (EPA:EDI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Groupe MEDIA 6

What Is Groupe MEDIA 6's Net Debt?

The image below, which you can click on for greater detail, shows that Groupe MEDIA 6 had debt of €19.4m at the end of September 2021, a reduction from €25.6m over a year. But it also has €19.6m in cash to offset that, meaning it has €178.0k net cash.

A Look At Groupe MEDIA 6's Liabilities

We can see from the most recent balance sheet that Groupe MEDIA 6 had liabilities of €28.5m falling due within a year, and liabilities of €23.8m due beyond that. Offsetting these obligations, it had cash of €19.6m as well as receivables valued at €16.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €16.3m.

This deficit is considerable relative to its market capitalization of €26.3m, so it does suggest shareholders should keep an eye on Groupe MEDIA 6's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Groupe MEDIA 6 also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Groupe MEDIA 6's EBIT was down 95% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Groupe MEDIA 6 will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Groupe MEDIA 6 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 three years, Groupe MEDIA 6 actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Groupe MEDIA 6 does have more liabilities than liquid assets, it also has net cash of €178.0k. The cherry on top was that in converted 144% of that EBIT to free cash flow, bringing in €2.0m. So while Groupe MEDIA 6 does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Groupe MEDIA 6 (of which 1 is a bit concerning!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.