We Think Mei Ah Entertainment Group (HKG:391) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Mei Ah Entertainment Group Limited (HKG:391) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Mei Ah Entertainment Group

What Is Mei Ah Entertainment Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Mei Ah Entertainment Group had HK$116.2m of debt in September 2023, down from HK$125.4m, one year before. However, it also had HK$40.4m in cash, and so its net debt is HK$75.9m.

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

According to the last reported balance sheet, Mei Ah Entertainment Group had liabilities of HK$120.4m due within 12 months, and liabilities of HK$204.8m due beyond 12 months. Offsetting these obligations, it had cash of HK$40.4m as well as receivables valued at HK$40.0m due within 12 months. So it has liabilities totalling HK$244.8m more than its cash and near-term receivables, combined.

Mei Ah Entertainment Group has a market capitalization of HK$906.3m, so it could very likely raise cash to ameliorate 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. 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 57%, to HK$108m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Mei Ah Entertainment Group still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at HK$13m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of HK$24m into a profit. So to be blunt we do think it is risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Mei Ah Entertainment Group insider transactions.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.