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

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Meitu, Inc. (HKG:1357) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Meitu

What Is Meitu's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Meitu had debt of CN¥10.0m, up from CN¥5.00m in one year. But it also has CN¥1.23b in cash to offset that, meaning it has CN¥1.22b net cash.

How Strong Is Meitu's Balance Sheet?

The latest balance sheet data shows that Meitu had liabilities of CN¥1.05b due within a year, and liabilities of CN¥182.6m falling due after that. Offsetting these obligations, it had cash of CN¥1.23b as well as receivables valued at CN¥356.8m due within 12 months. So it can boast CN¥353.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Meitu could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Meitu 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 it is Meitu's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Meitu wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to CN¥1.7b. With any luck the company will be able to grow its way to profitability.

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. And over the same period it saw negative free cash outflow of CN¥26m and booked a CN¥45m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.22b. 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. Be aware that Meitu is showing 1 warning sign in our investment analysis , 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.