Media Chinese International (HKG:685) could easily take on more debt

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Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies International Chinese Media Limited (HKG:685) uses debt. But does this debt worry shareholders?

Why is debt risky?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies 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 Media Chinese International

What is Media Chinese International’s debt?

As you can see below, Media Chinese International had a debt of US$22.7 million in March 2022, compared to US$32.1 million the previous year. However, his balance sheet shows that he holds $98.8 million in cash, so he actually has net cash of $76.1 million.

SEHK: 685 Historical Debt to Equity July 12, 2022

How strong is Media Chinese International’s balance sheet?

We can see from the most recent balance sheet that Media Chinese International had liabilities of US$51.6 million due in one year, and liabilities of US$5.77 million due beyond. On the other hand, it had a cash position of 98.8 million dollars and 17.1 million dollars of receivables at less than one year. He can therefore boast of having $58.6 million in cash more than total Passives.

This excess liquidity is an excellent indication that Media Chinese International’s balance sheet is almost as strong as Fort Knox’s. Given this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Media Chinese International has more cash than debt is arguably a good indication that it can safely manage its debt.

Although Media Chinese International had a loss in EBIT last year, it was also good to see that it generated $670,000 in EBIT in the last twelve months. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Media Chinese International can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Media Chinese International may have net cash on the balance sheet, but it is always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its ability to manage debt. Fortunately for all shareholders, Media Chinese International has actually produced more free cash flow than EBIT over the past year. There’s nothing better than incoming money to stay in the good books of your lenders.

Summary

While we sympathize with investors who find debt a concern, the bottom line is that Media Chinese International has net cash of US$76.1 million and plenty of liquid assets. And it impressed us with free cash flow of $12 million, or 1,726% of its EBIT. So is Media Chinese International’s debt a risk? This does not seem to us to be the case. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, we found 4 warning signs for Media Chinese International (1 is concerning!) that you should be aware of before investing here.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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