Is Media LinksLtd (TYO:6659) Using Too Much Debt?

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. As with many other companies Media Links Co.,Ltd. (TYO:6659) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Debt?

As you can see below, at the end of September 2020, Media LinksLtd had JP¥1.62b of debt, up from JP¥1.37b a year ago. Click the image for more detail. However, it does have JP¥1.70b in cash offsetting this, leading to net cash of JP¥83.0m.

A Look At Media LinksLtd's Liabilities

The latest balance sheet data shows that Media LinksLtd had liabilities of JP¥1.11b due within a year, and liabilities of JP¥943.0m falling due after that. Offsetting this, it had JP¥1.70b in cash and JP¥559.0m in receivables that were due within 12 months. So it actually has JP¥210.0m more liquid assets than total liabilities.

This surplus suggests that Media LinksLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Media LinksLtd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Media LinksLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Media LinksLtd had a loss before interest and tax, and actually shrunk its revenue by 3.0%, to JP¥2.6b. We would much prefer see growth.

So How Risky Is Media LinksLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Media LinksLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥316m of cash and made a loss of JP¥313m. While this does make the company a bit risky, it's important to remember it has net cash of JP¥83.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 2 warning signs for Media LinksLtd 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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