We Think Maoyan Entertainment (HKG:1896) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Maoyan Entertainment

What Is Maoyan Entertainment's Net Debt?

As you can see below, Maoyan Entertainment had CN¥383.7m of debt at June 2022, down from CN¥962.3m a year prior. But it also has CN¥2.38b in cash to offset that, meaning it has CN¥2.00b net cash.

How Healthy Is Maoyan Entertainment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Maoyan Entertainment had liabilities of CN¥2.36b due within 12 months and liabilities of CN¥119.8m due beyond that. Offsetting this, it had CN¥2.38b in cash and CN¥702.0m in receivables that were due within 12 months. So it actually has CN¥602.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Maoyan Entertainment could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Maoyan Entertainment has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Maoyan Entertainment's load is not too heavy, because its EBIT was down 26% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 last two years, Maoyan Entertainment actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Maoyan Entertainment has CN¥2.00b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 117% of that EBIT to free cash flow, bringing in CN¥43m. So we don't have any problem with Maoyan Entertainment's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Maoyan Entertainment, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.