Maoyan Entertainment (HKG:1896) Seems To Use Debt Rather Sparingly

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. Importantly, Maoyan Entertainment (HKG:1896) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Maoyan Entertainment

How Much Debt Does Maoyan Entertainment Carry?

You can click the graphic below for the historical numbers, but it shows that Maoyan Entertainment had CN¥597.0m of debt in December 2021, down from CN¥1.06b, one year before. However, it does have CN¥2.66b in cash offsetting this, leading to net cash of CN¥2.07b.

How Strong Is Maoyan Entertainment's Balance Sheet?

According to the last reported balance sheet, Maoyan Entertainment had liabilities of CN¥2.91b due within 12 months, and liabilities of CN¥132.0m due beyond 12 months. Offsetting this, it had CN¥2.66b in cash and CN¥1.08b in receivables that were due within 12 months. So it can boast CN¥702.5m more liquid assets than total liabilities.

This surplus suggests that Maoyan Entertainment has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Maoyan Entertainment boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Maoyan Entertainment made a loss at the EBIT level, last year, it was also good to see that it generated CN¥787m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Maoyan Entertainment'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Maoyan Entertainment may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent year, Maoyan Entertainment recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Maoyan Entertainment has net cash of CN¥2.07b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥560m, being 71% of its EBIT. So we don't think Maoyan Entertainment's use of debt is risky. 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. We've identified 1 warning sign with Maoyan Entertainment , and understanding them should be part of your investment process.

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.

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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.