The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Zinc Media Group plc (LON:ZIN) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Zinc Media Group Carry?
You can click the graphic below for the historical numbers, but it shows that Zinc Media Group had UK£3.43m of debt in December 2020, down from UK£3.84m, one year before. However, it does have UK£6.81m in cash offsetting this, leading to net cash of UK£3.38m.
How Strong Is Zinc Media Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Zinc Media Group had liabilities of UK£7.11m due within 12 months and liabilities of UK£4.84m due beyond that. Offsetting this, it had UK£6.81m in cash and UK£3.92m in receivables that were due within 12 months. So its liabilities total UK£1.24m more than the combination of its cash and short-term receivables.
Of course, Zinc Media Group has a market capitalization of UK£11.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Zinc Media Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Zinc Media Group 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.
Over 12 months, Zinc Media Group made a loss at the EBIT level, and saw its revenue drop to UK£20m, which is a fall of 29%. That makes us nervous, to say the least.
So How Risky Is Zinc Media Group?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Zinc Media Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of UK£1.3m and booked a UK£2.9m accounting loss. Given it only has net cash of UK£3.38m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. We've identified 4 warning signs with Zinc Media Group (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.
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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