Is Meta Media Holdings (HKG:72) 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.' 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. As with many other companies Meta Media Holdings Limited (HKG:72) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Meta Media Holdings

What Is Meta Media Holdings's Debt?

As you can see below, at the end of June 2023, Meta Media Holdings had CN¥185.7m of debt, up from CN¥148.5m a year ago. Click the image for more detail. However, it also had CN¥51.5m in cash, and so its net debt is CN¥134.2m.

A Look At Meta Media Holdings' Liabilities

We can see from the most recent balance sheet that Meta Media Holdings had liabilities of CN¥310.1m falling due within a year, and liabilities of CN¥74.2m due beyond that. Offsetting these obligations, it had cash of CN¥51.5m as well as receivables valued at CN¥142.8m due within 12 months. So it has liabilities totalling CN¥190.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥99.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Meta Media Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Meta Media Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Meta Media Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥359m, which is a fall of 13%. We would much prefer see growth.

Caveat Emptor

While Meta Media Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥60m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of CN¥70m. In the meantime, we consider the stock to be 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. To that end, you should learn about the 3 warning signs we've spotted with Meta Media Holdings (including 1 which doesn't sit too well with us) .

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.