These 4 Measures Indicate That One Media iP Group (LON:OMIP) Is Using Debt Extensively

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.' 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. As with many other companies One Media iP Group Plc (LON:OMIP) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for One Media iP Group

How Much Debt Does One Media iP Group Carry?

You can click the graphic below for the historical numbers, but it shows that One Media iP Group had UK£1.69m of debt in April 2023, down from UK£1.77m, one year before. But it also has UK£2.16m in cash to offset that, meaning it has UK£472.0k net cash.

How Strong Is One Media iP Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that One Media iP Group had liabilities of UK£1.19m due within 12 months and liabilities of UK£1.69m due beyond that. On the other hand, it had cash of UK£2.16m and UK£1.55m worth of receivables due within a year. So it can boast UK£829.8k more liquid assets than total liabilities.

This surplus suggests that One Media iP Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that One Media iP Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Shareholders should be aware that One Media iP Group's EBIT was down 43% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if One Media iP Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. One Media iP Group 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, One Media iP Group saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that One Media iP Group has net cash of UK£472.0k, as well as more liquid assets than liabilities. Despite the cash, we do find One Media iP Group's EBIT growth rate concerning, so we're not particularly comfortable with the stock. When analysing debt levels, the balance sheet is the obvious place to start. 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 3 warning signs for One Media iP Group 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.