Maoyan Entertainment (HKG:1896) Has A Rock Solid Balance Sheet

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.' 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. As with many other companies Maoyan Entertainment (HKG:1896) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Maoyan Entertainment

What Is Maoyan Entertainment's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Maoyan Entertainment had debt of CN¥477.3m, up from CN¥100.0m in one year. However, its balance sheet shows it holds CN¥3.70b in cash, so it actually has CN¥3.22b 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¥3.92b due within 12 months and liabilities of CN¥80.8m due beyond that. On the other hand, it had cash of CN¥3.70b and CN¥793.7m worth of receivables due within a year. So it can boast CN¥490.1m 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!

On top of that, Maoyan Entertainment grew its EBIT by 76% over the last twelve months, and that growth will make it easier to handle its debt. 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 Maoyan Entertainment 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 company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Maoyan Entertainment generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Maoyan Entertainment has CN¥3.22b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥168m, being 97% of its EBIT. So we don't think Maoyan Entertainment's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Maoyan Entertainment's earnings per share history for free.

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.