Stock Analysis

Is Neo Telemedia (HKG:8167) Using Debt Sensibly?

SEHK:8167
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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.' 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. We note that Neo Telemedia Limited (HKG:8167) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Neo Telemedia

What Is Neo Telemedia's Debt?

As you can see below, Neo Telemedia had HK$927.7m of debt at December 2022, down from HK$1.84b a year prior. However, it also had HK$154.6m in cash, and so its net debt is HK$773.2m.

debt-equity-history-analysis
SEHK:8167 Debt to Equity History April 12th 2023

A Look At Neo Telemedia's Liabilities

We can see from the most recent balance sheet that Neo Telemedia had liabilities of HK$1.82b falling due within a year, and liabilities of HK$1.01b due beyond that. On the other hand, it had cash of HK$154.6m and HK$370.0m worth of receivables due within a year. So it has liabilities totalling HK$2.31b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$714.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Neo Telemedia would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Neo Telemedia will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Neo Telemedia had a loss before interest and tax, and actually shrunk its revenue by 13%, to HK$532m. We would much prefer see growth.

Caveat Emptor

While Neo Telemedia's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable HK$108m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through HK$335m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Neo Telemedia you should be aware of, and 2 of them are a bit unpleasant.

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.