Modern Times Group MTG (STO:MTG B) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Modern Times Group MTG AB (publ) (STO:MTG B) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Modern Times Group MTG

What Is Modern Times Group MTG's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Modern Times Group MTG had debt of kr842.0m, up from kr98.0m in one year. But it also has kr8.18b in cash to offset that, meaning it has kr7.34b net cash.

How Healthy Is Modern Times Group MTG's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Modern Times Group MTG had liabilities of kr5.97b due within 12 months and liabilities of kr2.53b due beyond that. Offsetting these obligations, it had cash of kr8.18b as well as receivables valued at kr616.0m due within 12 months. So it actually has kr305.0m more liquid assets than total liabilities.

This surplus suggests that Modern Times Group MTG has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

The bad news is that Modern Times Group MTG saw its EBIT decline by 15% over the last year. If earnings continue to decline at that rate then handling the debt will be more difficult than taking three children under 5 to a fancy pants restaurant. 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 Modern Times Group MTG'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 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. Over the last two years, Modern Times Group MTG actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Modern Times Group MTG has net cash of kr7.34b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of kr9.5b, being 1,369% of its EBIT. So we don't have any problem with Modern Times Group MTG's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Modern Times Group MTG 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. 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.