Is Linmon Media (HKG:9857) Using Debt In A Risky Way?

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.' 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. We can see that Linmon Media Limited (HKG:9857) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Linmon Media Carry?

As you can see below, at the end of December 2024, Linmon Media had CN¥60.0m of debt, up from none a year ago. Click the image for more detail. But it also has CN¥1.64b in cash to offset that, meaning it has CN¥1.58b net cash.

A Look At Linmon Media's Liabilities

We can see from the most recent balance sheet that Linmon Media had liabilities of CN¥518.8m falling due within a year, and liabilities of CN¥385.2m due beyond that. Offsetting this, it had CN¥1.64b in cash and CN¥282.4m in receivables that were due within 12 months. So it can boast CN¥1.02b more liquid assets than total liabilities.

This excess liquidity is a great indication that Linmon Media's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Linmon Media boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Linmon Media 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.

View our latest analysis for Linmon Media

In the last year Linmon Media had a loss before interest and tax, and actually shrunk its revenue by 46%, to CN¥657m. That makes us nervous, to say the least.

So How Risky Is Linmon Media?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Linmon Media had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥262m of cash and made a loss of CN¥189m. But the saving grace is the CN¥1.58b on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For instance, we've identified 1 warning sign for Linmon Media that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.