Is Mei Ah Entertainment Group (HKG:391) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Mei Ah Entertainment Group Limited (HKG:391) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Mei Ah Entertainment Group

How Much Debt Does Mei Ah Entertainment Group Carry?

The image below, which you can click on for greater detail, shows that at March 2022 Mei Ah Entertainment Group had debt of HK$143.3m, up from HK$128.7m in one year. However, it does have HK$20.8m in cash offsetting this, leading to net debt of about HK$122.5m.

How Healthy Is Mei Ah Entertainment Group's Balance Sheet?

The latest balance sheet data shows that Mei Ah Entertainment Group had liabilities of HK$163.1m due within a year, and liabilities of HK$225.2m falling due after that. Offsetting this, it had HK$20.8m in cash and HK$26.2m in receivables that were due within 12 months. So its liabilities total HK$341.3m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Mei Ah Entertainment Group is worth HK$586.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mei Ah Entertainment 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.

In the last year Mei Ah Entertainment Group had a loss before interest and tax, and actually shrunk its revenue by 18%, to HK$78m. That's not what we would hope to see.

Caveat Emptor

Not only did Mei Ah Entertainment Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost HK$44m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of HK$39m into a profit. So to be blunt we do think it is risky. 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. We've identified 1 warning sign with Mei Ah Entertainment Group , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.