Is SEEC Media Group (HKG:205) A Risky Investment?

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. 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.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for SEEC Media Group

What Is SEEC Media Group's Debt?

The chart below, which you can click on for greater detail, shows that SEEC Media Group had HK$30.1m in debt in June 2024; about the same as the year before. But it also has HK$60.7m in cash to offset that, meaning it has HK$30.6m net cash.

A Look At SEEC Media Group's Liabilities

We can see from the most recent balance sheet that SEEC Media Group had liabilities of HK$165.5m falling due within a year, and liabilities of HK$20.2m due beyond that. Offsetting this, it had HK$60.7m in cash and HK$240.3m in receivables that were due within 12 months. So it actually has HK$115.3m more liquid assets than total liabilities.

This luscious liquidity implies that SEEC Media Group's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, SEEC Media Group made a loss at the EBIT level, and saw its revenue drop to HK$32m, which is a fall of 49%. That makes us nervous, to say the least.

So How Risky Is SEEC Media Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months SEEC Media Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$33m of cash and made a loss of HK$44m. However, it has net cash of HK$30.6m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 2 warning signs with SEEC Media Group , and understanding them should be part of your investment process.

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.