We Think Media Prima Berhad (KLSE:MEDIA) Is Taking Some Risk With Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Media Prima Berhad (KLSE:MEDIA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See 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 September 2020 Media Prima Berhad had RM138.9m of debt, an increase on RM10.0m, over one year. However, its balance sheet shows it holds RM276.2m in cash, so it actually has RM137.3m net cash.

How Healthy Is Media Prima Berhad's Balance Sheet?

According to the last reported balance sheet, Media Prima Berhad had liabilities of RM542.5m due within 12 months, and liabilities of RM287.8m due beyond 12 months. Offsetting this, it had RM276.2m in cash and RM245.4m in receivables that were due within 12 months. So it has liabilities totalling RM308.7m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of RM434.5m, so it does suggest shareholders should keep an eye on Media Prima Berhad's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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 RM708k. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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

While Media Prima Berhad does have more liabilities than liquid assets, it also has net cash of RM137.3m. Despite its cash we think that Media Prima Berhad seems to struggle to convert EBIT to free cash flow, so we are wary of the 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. Be aware that Media Prima Berhad is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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