Is Meitu (HKG:1357) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Meitu, Inc. (HKG:1357) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Meitu

How Much Debt Does Meitu Carry?

The image below, which you can click on for greater detail, shows that at June 2021 Meitu had debt of CN¥10.0m, up from none in one year. However, its balance sheet shows it holds CN¥1.07b in cash, so it actually has CN¥1.06b net cash.

How Healthy Is Meitu's Balance Sheet?

We can see from the most recent balance sheet that Meitu had liabilities of CN¥842.1m falling due within a year, and liabilities of CN¥146.7m due beyond that. On the other hand, it had cash of CN¥1.07b and CN¥1.09b worth of receivables due within a year. So it actually has CN¥1.17b more liquid assets than total liabilities.

This excess liquidity suggests that Meitu is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Meitu has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Meitu 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.

In the last year Meitu wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to CN¥1.4b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Meitu?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Meitu had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥1.2b of cash and made a loss of CN¥154m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.06b. That kitty means the company can keep spending for growth for at least two years, at current rates. Meitu's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Meitu , and understanding them should be part of your investment process.

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.

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.

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