Is One Media Group (HKG:426) A Risky Investment?

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. As with many other companies One Media Group Limited (HKG:426) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for One Media Group

What Is One Media Group's Debt?

The image below, which you can click on for greater detail, shows that at March 2021 One Media Group had debt of HK$114.6m, up from none in one year. However, its balance sheet shows it holds HK$115.1m in cash, so it actually has HK$440.0k net cash.

How Strong Is One Media Group's Balance Sheet?

The latest balance sheet data shows that One Media Group had liabilities of HK$13.4m due within a year, and liabilities of HK$115.1m falling due after that. Offsetting this, it had HK$115.1m in cash and HK$10.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$2.86m.

Since publicly traded One Media Group shares are worth a total of HK$68.6m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, One Media Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since One 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.

Over 12 months, One Media Group made a loss at the EBIT level, and saw its revenue drop to HK$46m, which is a fall of 34%. To be frank that doesn't bode well.

So How Risky Is One Media Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year One Media Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$16m of cash and made a loss of HK$17m. While this does make the company a bit risky, it's important to remember it has net cash of HK$440.0k. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 2 warning signs with One Media Group (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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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