Media Prima Berhad (KLSE:MEDIA) Has A Somewhat Strained Balance Sheet

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 Media Prima Berhad (KLSE:MEDIA) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Media Prima Berhad

How Much Debt Does Media Prima Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Media Prima Berhad had RM125.5m of debt, an increase on RM4.69m, over one year. But it also has RM314.1m in cash to offset that, meaning it has RM188.6m net cash.

How Healthy Is Media Prima Berhad's Balance Sheet?

According to the last reported balance sheet, Media Prima Berhad had liabilities of RM532.1m due within 12 months, and liabilities of RM261.9m due beyond 12 months. Offsetting this, it had RM314.1m in cash and RM199.7m in receivables that were due within 12 months. So it has liabilities totalling RM280.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Media Prima Berhad has a market capitalization of RM815.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Media Prima Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Media Prima Berhad improved its EBIT from a last year's loss to a positive RM27m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Media Prima Berhad's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Media Prima Berhad 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. Over the last year, Media Prima Berhad saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

Although Media Prima Berhad's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RM188.6m. So while Media Prima Berhad does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. 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 Prima Berhad 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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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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