We Think Meitu (HKG:1357) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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 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?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Meitu had CN¥149.6m of debt, an increase on CN¥10.0m, over one year. However, its balance sheet shows it holds CN¥1.31b in cash, so it actually has CN¥1.16b net cash.

A Look At Meitu's Liabilities

We can see from the most recent balance sheet that Meitu had liabilities of CN¥1.26b falling due within a year, and liabilities of CN¥389.1m due beyond that. Offsetting these obligations, it had cash of CN¥1.31b as well as receivables valued at CN¥387.7m due within 12 months. So it actually has CN¥48.7m more liquid assets than total liabilities.

This state of affairs indicates that Meitu's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥13.9b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Meitu has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Meitu turned things around in the last 12 months, delivering and EBIT of CN¥291m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Meitu 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. While Meitu has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Meitu actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Meitu has net cash of CN¥1.16b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥361m, being 124% of its EBIT. So we don't think Meitu's use of debt is risky. 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 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.

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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.