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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Media Links Co.,Ltd. (TSE:6659) does use debt in its business. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Media LinksLtd's Debt?

As you can see below, Media LinksLtd had JP¥672.0m of debt at December 2024, down from JP¥745.0m a year prior. However, because it has a cash reserve of JP¥405.0m, its net debt is less, at about JP¥267.0m.

A Look At Media LinksLtd's Liabilities

We can see from the most recent balance sheet that Media LinksLtd had liabilities of JP¥943.0m falling due within a year, and liabilities of JP¥125.0m due beyond that. On the other hand, it had cash of JP¥405.0m and JP¥167.0m worth of receivables due within a year. So its liabilities total JP¥496.0m more than the combination of its cash and short-term receivables.

Of course, Media LinksLtd has a market capitalization of JP¥3.31b, so these liabilities are probably manageable. 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.

See our latest analysis for Media LinksLtd

In the last year Media LinksLtd had a loss before interest and tax, and actually shrunk its revenue by 2.3%, to JP¥2.7b. We would much prefer see growth.

Caveat Emptor

Importantly, Media LinksLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable JP¥543m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through JP¥989m of cash over the last year. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Media LinksLtd (of which 3 don't sit too well with us!) 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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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.