Is SEEC Media Group (HKG:205) Using Too Much Debt?

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. Importantly, SEEC Media Group Limited (HKG:205) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for SEEC Media Group

What Is SEEC Media Group's Debt?

As you can see below, at the end of June 2023, SEEC Media Group had HK$30.2m of debt, up from HK$23.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$88.4m in cash, so it actually has HK$58.2m net cash.

How Healthy 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$188.0m due within 12 months and liabilities of HK$20.7m due beyond that. On the other hand, it had cash of HK$88.4m and HK$268.1m worth of receivables due within a year. So it actually has HK$147.9m more liquid assets than total liabilities.

This surplus liquidity suggests that SEEC Media Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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 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.

In the last year SEEC Media Group's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is SEEC Media Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that SEEC Media Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$8.5m and booked a HK$55m accounting loss. With only HK$58.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - SEEC Media Group has 1 warning sign we think you should be aware of.

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.