These 4 Measures Indicate That MultiChoice Group (JSE:MCG) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies MultiChoice Group Limited (JSE:MCG) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for MultiChoice Group

What Is MultiChoice Group's Net Debt?

As you can see below, at the end of March 2022, MultiChoice Group had R4.02b of debt, up from R1.90b a year ago. Click the image for more detail. But on the other hand it also has R6.16b in cash, leading to a R2.13b net cash position.

A Look At MultiChoice Group's Liabilities

The latest balance sheet data shows that MultiChoice Group had liabilities of R20.9b due within a year, and liabilities of R13.9b falling due after that. Offsetting these obligations, it had cash of R6.16b as well as receivables valued at R2.89b due within 12 months. So it has liabilities totalling R25.7b more than its cash and near-term receivables, combined.

MultiChoice Group has a market capitalization of R50.8b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, MultiChoice Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, MultiChoice Group grew its EBIT by 2.1% in the last year, making that debt load look even more manageable. 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 MultiChoice Group'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While MultiChoice Group 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 three years, MultiChoice Group produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although MultiChoice Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of R2.13b. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in R7.6b. So we don't have any problem with MultiChoice Group's use of debt. 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. We've identified 3 warning signs with MultiChoice Group , and understanding them should be part of your investment process.

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. 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.