Is Media LinksLtd (TYO:6659) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Media Links Co.,Ltd. (TYO:6659) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Media LinksLtd

What Is Media LinksLtd's Net Debt?

As you can see below, Media LinksLtd had JP¥1.53b of debt at December 2020, down from JP¥1.79b a year prior. However, it does have JP¥1.44b in cash offsetting this, leading to net debt of about JP¥92.0m.

A Look At Media LinksLtd's Liabilities

The latest balance sheet data shows that Media LinksLtd had liabilities of JP¥948.0m due within a year, and liabilities of JP¥869.0m falling due after that. On the other hand, it had cash of JP¥1.44b and JP¥229.0m worth of receivables due within a year. So it has liabilities totalling JP¥152.0m more than its cash and near-term receivables, combined.

Given Media LinksLtd has a market capitalization of JP¥2.82b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Media LinksLtd 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 Media LinksLtd had a loss before interest and tax, and actually shrunk its revenue by 25%, to JP¥2.2b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Media LinksLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable JP¥553m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled JP¥316m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example Media LinksLtd has 3 warning signs (and 1 which is concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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