Is Maoyan Entertainment (HKG:1896) A Risky Investment?

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 Maoyan Entertainment (HKG:1896) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Maoyan Entertainment

What Is Maoyan Entertainment's Debt?

You can click the graphic below for the historical numbers, but it shows that Maoyan Entertainment had CN¥250.0m of debt in December 2023, down from CN¥335.0m, one year before. However, its balance sheet shows it holds CN¥3.44b in cash, so it actually has CN¥3.19b net cash.

How Strong Is Maoyan Entertainment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Maoyan Entertainment had liabilities of CN¥3.40b due within 12 months and liabilities of CN¥102.3m due beyond that. Offsetting these obligations, it had cash of CN¥3.44b as well as receivables valued at CN¥943.6m due within 12 months. So it actually has CN¥881.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Maoyan Entertainment could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Maoyan Entertainment boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Maoyan Entertainment grew its EBIT by 389% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Maoyan Entertainment's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Maoyan Entertainment 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. In the last three years, Maoyan Entertainment's free cash flow amounted to 29% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Maoyan Entertainment has CN¥3.19b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 389% over the last year. So we don't think Maoyan Entertainment's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Maoyan Entertainment, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.