Here's Why Modern Times Group MTG (STO:MTG B) Can Manage Its Debt Responsibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Modern Times Group MTG AB (publ) (STO:MTG B) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, 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.

View our latest analysis for Modern Times Group MTG

What Is Modern Times Group MTG's Debt?

As you can see below, Modern Times Group MTG had kr613.0m of debt at September 2022, down from kr2.72b a year prior. However, it does have kr4.70b in cash offsetting this, leading to net cash of kr4.08b.

A Look At Modern Times Group MTG's Liabilities

We can see from the most recent balance sheet that Modern Times Group MTG had liabilities of kr2.33b falling due within a year, and liabilities of kr2.62b due beyond that. Offsetting this, it had kr4.70b in cash and kr638.0m in receivables that were due within 12 months. So it actually has kr383.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Modern Times Group MTG could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Modern Times Group MTG has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Modern Times Group MTG's EBIT fell a jaw-dropping 23% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Modern Times Group MTG can strengthen its balance sheet over time. 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 Modern Times Group MTG 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. Happily for any shareholders, Modern Times Group MTG actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Modern Times Group MTG has kr4.08b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of kr9.3b, being 1,119% of its EBIT. So we don't have any problem with Modern Times Group MTG's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Modern Times Group MTG is showing 1 warning sign in our investment analysis , you should know about...

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. 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.