Cameo Communications (TPE:6142) Is Carrying A Fair Bit Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Cameo Communications, Inc. (TPE:6142) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Cameo Communications

What Is Cameo Communications's Debt?

As you can see below, at the end of September 2020, Cameo Communications had NT$1.61b of debt, up from NT$1.07b a year ago. Click the image for more detail. However, it also had NT$725.2m in cash, and so its net debt is NT$883.5m.

A Look At Cameo Communications' Liabilities

According to the last reported balance sheet, Cameo Communications had liabilities of NT$1.91b due within 12 months, and liabilities of NT$999.7m due beyond 12 months. Offsetting this, it had NT$725.2m in cash and NT$1.19b in receivables that were due within 12 months. So it has liabilities totalling NT$996.4m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Cameo Communications has a market capitalization of NT$2.68b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Cameo Communications will need earnings to service that debt. 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.

In the last year Cameo Communications had a loss before interest and tax, and actually shrunk its revenue by 13%, to NT$3.0b. We would much prefer see growth.

Caveat Emptor

Not only did Cameo Communications's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping NT$482m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$691m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For example, we've discovered 4 warning signs for Cameo Communications (2 don't sit too well with us!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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