Is Media Chinese International (HKG:685) A Risky Investment?

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.' 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 Media Chinese International Limited (HKG:685) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Media Chinese International

What Is Media Chinese International's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Media Chinese International had debt of US$27.1m, up from US$21.9m in one year. But on the other hand it also has US$91.6m in cash, leading to a US$64.5m net cash position.

How Healthy Is Media Chinese International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Media Chinese International had liabilities of US$57.5m due within 12 months and liabilities of US$6.28m due beyond that. Offsetting these obligations, it had cash of US$91.6m as well as receivables valued at US$21.1m due within 12 months. So it actually has US$49.0m more liquid assets than total liabilities.

This surplus liquidity suggests that Media Chinese International's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Media Chinese International has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Media Chinese International can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Media Chinese International had a loss before interest and tax, and actually shrunk its revenue by 37%, to US$120m. That makes us nervous, to say the least.

So How Risky Is Media Chinese International?

While Media Chinese International lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$2.5m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. There's no doubt the next few years will be crucial to how the business matures. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Media Chinese International that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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