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

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.' 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. As with many other companies Modern Times Group MTG AB (STO:MTG B) makes use of 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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Modern Times Group MTG

What Is Modern Times Group MTG's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Modern Times Group MTG had debt of kr602.0m, up from kr557.0m in one year. However, its balance sheet shows it holds kr3.54b in cash, so it actually has kr2.94b 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 kr2.94b due within 12 months and liabilities of kr1.39b due beyond that. On the other hand, it had cash of kr3.54b and kr790.0m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Modern Times Group MTG's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the kr13.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Modern Times Group MTG boasts net cash, so it's fair to say it does not have a heavy debt load!

While Modern Times Group MTG doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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.

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. Happily for any shareholders, Modern Times Group MTG actually produced more free cash flow than EBIT over the last three years. 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 kr2.94b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of kr1.2b, being 485% of its EBIT. So is Modern Times Group MTG's debt a risk? It doesn't seem so to us. 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. Be aware that Modern Times Group MTG is showing 1 warning sign in our investment analysis , 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.