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. Importantly, SEEC Media Group Limited (HKG:205) does carry debt. But is this debt a concern to shareholders?
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for SEEC Media Group
How Much Debt Does SEEC Media Group Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2022 SEEC Media Group had HK$33.5m of debt, an increase on HK$3.16m, over one year. But on the other hand it also has HK$118.3m in cash, leading to a HK$84.8m net cash position.
How Strong Is SEEC Media Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that SEEC Media Group had liabilities of HK$198.9m due within 12 months and liabilities of HK$22.7m due beyond that. Offsetting this, it had HK$118.3m in cash and HK$210.3m in receivables that were due within 12 months. So it actually has HK$107.0m more liquid assets than total liabilities.
This surplus strongly suggests that SEEC Media Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, SEEC Media Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Another good sign is that SEEC Media Group has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SEEC Media Group 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While SEEC Media Group 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. During the last three years, SEEC Media Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While it is always sensible to investigate a company's debt, in this case SEEC Media Group has HK$84.8m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 27% over the last year. So is SEEC Media Group's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 3 warning signs for SEEC Media Group (1 shouldn't be ignored) you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
About SEHK:205
SEEC Media Group
An investment holding company, provides advertising agency services in the People's Republic of China and Hong Kong.
Excellent balance sheet low.