Is 4fun Media (WSE:4FM) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that 4fun Media S.A. (WSE:4FM) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for 4fun Media

How Much Debt Does 4fun Media Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 4fun Media had zł5.58m of debt, an increase on zł5.26m, over one year. However, because it has a cash reserve of zł2.57m, its net debt is less, at about zł3.01m.

How Strong Is 4fun Media's Balance Sheet?

The latest balance sheet data shows that 4fun Media had liabilities of zł26.1m due within a year, and liabilities of zł17.5m falling due after that. Offsetting these obligations, it had cash of zł2.57m as well as receivables valued at zł11.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł30.0m.

The deficiency here weighs heavily on the zł19.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, 4fun Media would probably need a major re-capitalization if its creditors were to demand repayment. 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 4fun Media will need earnings to service that debt. 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 4fun Media had a loss before interest and tax, and actually shrunk its revenue by 11%, to zł55m. We would much prefer see growth.

Caveat Emptor

While 4fun Media's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at zł988k. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of zł11m. And until that time we think this is a risky stock. 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. For instance, we've identified 2 warning signs for 4fun Media that you should be aware of.

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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