These 4 Measures Indicate That Modern Times Group Mtg (STO:MTG B) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Modern Times Group Mtg AB (STO:MTG B) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Modern Times Group Mtg

What Is Modern Times Group Mtg's Debt?

As you can see below, at the end of December 2020, Modern Times Group Mtg had kr1.14b of debt, up from none a year ago. Click the image for more detail. However, it does have kr1.15b in cash offsetting this, leading to net cash of kr9.00m.

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 kr4.20b falling due within a year, and liabilities of kr1.39b due beyond that. Offsetting these obligations, it had cash of kr1.15b as well as receivables valued at kr837.0m due within 12 months. So its liabilities total kr3.60b more than the combination of its cash and short-term receivables.

Modern Times Group Mtg has a market capitalization of kr11.9b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Modern Times Group Mtg also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Modern Times Group Mtg made a loss at the EBIT level, last year, but improved that to positive EBIT of kr44m in the last twelve months. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Modern Times Group Mtg may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Modern Times Group Mtg actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Modern Times Group Mtg does have more liabilities than liquid assets, it also has net cash of kr9.00m. And it impressed us with free cash flow of kr62m, being 141% of its EBIT. So we are not troubled with Modern Times Group Mtg's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Modern Times Group Mtg 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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