MEDIA DO (TSE:3678) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, MEDIA DO Co., Ltd. (TSE:3678) 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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for MEDIA DO

How Much Debt Does MEDIA DO Carry?

As you can see below, MEDIA DO had JP¥5.02b of debt at May 2024, down from JP¥6.29b a year prior. However, its balance sheet shows it holds JP¥10.8b in cash, so it actually has JP¥5.74b net cash.

How Strong Is MEDIA DO's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MEDIA DO had liabilities of JP¥31.9b due within 12 months and liabilities of JP¥3.71b due beyond that. Offsetting these obligations, it had cash of JP¥10.8b as well as receivables valued at JP¥23.6b due within 12 months. So it has liabilities totalling JP¥1.28b more than its cash and near-term receivables, combined.

Since publicly traded MEDIA DO shares are worth a total of JP¥20.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, MEDIA DO also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that MEDIA DO saw its EBIT decline by 9.1% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if MEDIA DO 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While MEDIA DO has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, MEDIA DO generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about MEDIA DO's liabilities, but we can be reassured by the fact it has has net cash of JP¥5.74b. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in JP¥2.4b. So we don't think MEDIA DO's use of debt is risky. 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. Be aware that MEDIA DO is showing 2 warning signs in our investment analysis , you should know about...

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.