SEEC Media Group (HKG:205) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that SEEC Media Group Limited (HKG:205) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

See our latest analysis for SEEC Media Group

How Much Debt Does SEEC Media Group Carry?

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. However, its balance sheet shows it holds HK$108.5m in cash, so it actually has HK$83.5m net cash.

A Look At SEEC Media Group's Liabilities

Zooming in on the latest balance sheet data, we can see that SEEC Media Group had liabilities of HK$254.2m due within 12 months and liabilities of HK$4.13m due beyond that. Offsetting this, it had HK$108.5m in cash and HK$392.6m in receivables that were due within 12 months. So it actually has HK$242.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that SEEC Media Group's balance sheet is almost as strong as Fort Knox. 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. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last year, SEEC Media Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that SEEC Media Group has net cash of HK$83.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of HK$31m, being 423% of its EBIT. So is SEEC Media Group's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with SEEC Media Group (at least 1 which doesn't sit too well with us) , 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.