Mei Ah Entertainment Group (HKG:391) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Mei Ah Entertainment Group Limited (HKG:391) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Mei Ah Entertainment Group

What Is Mei Ah Entertainment Group's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Mei Ah Entertainment Group had debt of HK$128.6m, up from HK$93.8m in one year. However, because it has a cash reserve of HK$28.1m, its net debt is less, at about HK$100.5m.

A Look At Mei Ah Entertainment Group's Liabilities

According to the last reported balance sheet, Mei Ah Entertainment Group had liabilities of HK$218.8m due within 12 months, and liabilities of HK$200.5m due beyond 12 months. On the other hand, it had cash of HK$28.1m and HK$52.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$338.7m.

This is a mountain of leverage relative to its market capitalization of HK$509.4m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 6.2%, to HK$129m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Mei Ah Entertainment Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$42m 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. However, it doesn't help that it burned through HK$47m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Mei Ah Entertainment Group you should be aware of, and 2 of them make us uncomfortable.

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. 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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