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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Modern Times Group Mtg AB (STO:MTG B) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Modern Times Group Mtg

What Is Modern Times Group Mtg's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Modern Times Group Mtg had kr98.0m of debt, an increase on none, over one year. However, it does have kr1.23b in cash offsetting this, leading to net cash of kr1.13b.

How Strong Is Modern Times Group Mtg's Balance Sheet?

According to the last reported balance sheet, Modern Times Group Mtg had liabilities of kr1.71b due within 12 months, and liabilities of kr1.53b due beyond 12 months. Offsetting this, it had kr1.23b in cash and kr920.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr1.09b.

Given Modern Times Group Mtg has a market capitalization of kr13.7b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

Although Modern Times Group Mtg made a loss at the EBIT level, last year, it was also good to see that it generated kr174m in EBIT over 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last year, Modern Times Group Mtg burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

We could understand if investors are concerned about Modern Times Group Mtg's liabilities, but we can be reassured by the fact it has has net cash of kr1.13b. 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 1 warning sign for Modern Times Group Mtg 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. 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.
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