Here's Why SEEC Media Group (HKG:205) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies SEEC Media Group Limited (HKG:205) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for SEEC Media Group

What Is SEEC Media Group's Net Debt?

The chart below, which you can click on for greater detail, shows that SEEC Media Group had HK$25.0m in debt in June 2021; about the same as the year before. But on the other hand it also has HK$108.5m in cash, leading to a HK$83.5m net cash position.

How Strong Is SEEC Media Group's Balance Sheet?

The latest balance sheet data shows that SEEC Media Group had liabilities of HK$254.2m due within a year, and liabilities of HK$4.13m falling due after that. Offsetting these obligations, it had cash of HK$108.5m as well as receivables valued at HK$392.6m due within 12 months. So it can boast HK$242.8m more liquid assets than total liabilities.

This luscious liquidity implies that SEEC Media Group's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that SEEC Media Group has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that SEEC Media Group improved its EBIT from a last year's loss to a positive HK$7.3m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SEEC Media Group's earnings that will influence how the balance sheet holds up in the future. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last year, SEEC Media Group saw substantial negative free cash flow, in total. 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$83.5m in net cash and a decent-looking balance sheet. So we are not troubled with SEEC Media Group's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with SEEC Media Group (including 1 which shouldn't be ignored) .

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.
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