Is Media Chinese International (HKG:685) Weighed On By Its Debt Load?

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 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. Importantly, Media Chinese International Limited (HKG:685) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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

How Much Debt Does Media Chinese International Carry?

As you can see below, at the end of December 2020, Media Chinese International had US$20.7m of debt, up from US$18.1m a year ago. Click the image for more detail. However, it does have US$83.8m in cash offsetting this, leading to net cash of US$63.1m.

How Strong Is Media Chinese International's Balance Sheet?

We can see from the most recent balance sheet that Media Chinese International had liabilities of US$55.3m falling due within a year, and liabilities of US$7.31m due beyond that. On the other hand, it had cash of US$83.8m and US$23.7m worth of receivables due within a year. So it can boast US$44.8m more liquid assets than total liabilities.

This luscious liquidity implies that Media Chinese International's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Media Chinese International boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Media Chinese International's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Media Chinese International had a loss before interest and tax, and actually shrunk its revenue by 51%, to US$125m. To be frank that doesn't bode well.

So How Risky Is Media Chinese International?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Media Chinese International had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$3.3m of cash and made a loss of US$5.3m. Given it only has net cash of US$63.1m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Media Chinese International .

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. 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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