Broadmedia (TYO:4347) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Broadmedia Corporation (TYO:4347) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Broadmedia

How Much Debt Does Broadmedia Carry?

You can click the graphic below for the historical numbers, but it shows that Broadmedia had JP¥183.0m of debt in September 2020, down from JP¥450.0m, one year before. However, it does have JP¥2.60b in cash offsetting this, leading to net cash of JP¥2.41b.

A Look At Broadmedia's Liabilities

According to the last reported balance sheet, Broadmedia had liabilities of JP¥2.57b due within 12 months, and liabilities of JP¥465.0m due beyond 12 months. Offsetting this, it had JP¥2.60b in cash and JP¥1.13b in receivables that were due within 12 months. So it actually has JP¥691.0m more liquid assets than total liabilities.

This surplus suggests that Broadmedia has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Broadmedia has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Broadmedia grew its EBIT by 5.9% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Broadmedia 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Broadmedia may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Broadmedia actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Broadmedia has JP¥2.41b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 180% of that EBIT to free cash flow, bringing in JP¥1.1b. So is Broadmedia's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Broadmedia 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. 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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