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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that One Media iP Group Plc (LON:OMIP) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does One Media iP Group Carry?
The chart below, which you can click on for greater detail, shows that One Media iP Group had UK£1.77m in debt in April 2022; about the same as the year before. But on the other hand it also has UK£2.14m in cash, leading to a UK£368.3k net cash position.
A Look At One Media iP Group's Liabilities
The latest balance sheet data shows that One Media iP Group had liabilities of UK£1.19m due within a year, and liabilities of UK£1.77m falling due after that. On the other hand, it had cash of UK£2.14m and UK£1.44m worth of receivables due within a year. So it actually has UK£618.6k 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. Succinctly put, One Media iP Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Another good sign is that One Media iP Group has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While it is always sensible to investigate a company's debt, in this case One Media iP Group has UK£368.3k in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 21% over the last year. So we are not troubled with One Media iP Group's debt use. 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. For example, we've discovered 3 warning signs for One Media iP Group (1 can't be ignored!) that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Valuation is complex, but we're helping make it simple.
Find out whether One Media iP Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis