Does MacroWell OMG Digital Entertainment (GTSM:3687) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies MacroWell OMG Digital Entertainment Co., Ltd. (GTSM:3687) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for MacroWell OMG Digital Entertainment

How Much Debt Does MacroWell OMG Digital Entertainment Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 MacroWell OMG Digital Entertainment had NT$130.0m of debt, an increase on NT$61.6m, over one year. But on the other hand it also has NT$963.9m in cash, leading to a NT$833.9m net cash position.

How Strong Is MacroWell OMG Digital Entertainment's Balance Sheet?

The latest balance sheet data shows that MacroWell OMG Digital Entertainment had liabilities of NT$3.15b due within a year, and liabilities of NT$143.6m falling due after that. Offsetting this, it had NT$963.9m in cash and NT$24.4m in receivables that were due within 12 months. So it has liabilities totalling NT$2.30b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the NT$1.47b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, MacroWell OMG Digital Entertainment would probably need a major re-capitalization if its creditors were to demand repayment. MacroWell OMG Digital Entertainment boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Even more impressive was the fact that MacroWell OMG Digital Entertainment grew its EBIT by 252% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is MacroWell OMG Digital Entertainment's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While MacroWell OMG Digital Entertainment 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 two years, MacroWell OMG Digital Entertainment produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While MacroWell OMG Digital Entertainment does have more liabilities than liquid assets, it also has net cash of NT$833.9m. And we liked the look of last year's 252% year-on-year EBIT growth. So we are not troubled with MacroWell OMG Digital Entertainment's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - MacroWell OMG Digital Entertainment has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

When trading MacroWell OMG Digital Entertainment or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.