Is Neo Telemedia (HKG:8167) Weighed On By Its Debt Load?

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. We can see that Neo Telemedia Limited (HKG:8167) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Neo Telemedia

What Is Neo Telemedia's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Neo Telemedia had debt of HK$2.09b, up from HK$1.20b in one year. However, it does have HK$100.5m in cash offsetting this, leading to net debt of about HK$1.99b.

A Look At Neo Telemedia's Liabilities

According to the last reported balance sheet, Neo Telemedia had liabilities of HK$2.99b due within 12 months, and liabilities of HK$287.6m due beyond 12 months. Offsetting this, it had HK$100.5m in cash and HK$102.2m in receivables that were due within 12 months. So it has liabilities totalling HK$3.07b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$1.61b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Neo Telemedia 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 Neo Telemedia'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, Neo Telemedia made a loss at the EBIT level, and saw its revenue drop to HK$436m, which is a fall of 38%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Neo Telemedia's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost HK$78m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through HK$219m in negative free cash flow over the last year. That means it's on the risky side of things. 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 example - Neo Telemedia has 2 warning signs we think 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.
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