MacroWell OMG Digital Entertainment (GTSM:3687) Has A Rock Solid Balance Sheet

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. We can see that MacroWell OMG Digital Entertainment Co., Ltd. (GTSM:3687) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 December 2020 MacroWell OMG Digital Entertainment had NT$150.0m of debt, an increase on NT$130.0m, over one year. However, it does have NT$2.03b in cash offsetting this, leading to net cash of NT$1.88b.

A Look At MacroWell OMG Digital Entertainment's Liabilities

We can see from the most recent balance sheet that MacroWell OMG Digital Entertainment had liabilities of NT$3.01b falling due within a year, and liabilities of NT$51.9m due beyond that. On the other hand, it had cash of NT$2.03b and NT$653.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$372.9m.

This deficit isn't so bad because MacroWell OMG Digital Entertainment is worth NT$1.45b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, MacroWell OMG Digital Entertainment also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that MacroWell OMG Digital Entertainment has boosted its EBIT by 79%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is MacroWell OMG Digital Entertainment's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Happily for any shareholders, MacroWell OMG Digital Entertainment actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While MacroWell OMG Digital Entertainment does have more liabilities than liquid assets, it also has net cash of NT$1.88b. The cherry on top was that in converted 216% of that EBIT to free cash flow, bringing in NT$611m. So is MacroWell OMG Digital Entertainment's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for MacroWell OMG Digital Entertainment that 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.

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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.
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