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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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Zinc Media Group plc (LON:ZIN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
See our latest analysis for Zinc Media Group
What Is Zinc Media Group's Debt?
As you can see below, Zinc Media Group had UK£3.43m of debt at December 2020, down from UK£3.84m a year prior. However, its balance sheet shows it holds UK£6.81m in cash, so it actually has UK£3.38m net cash.
A Look At Zinc Media Group's Liabilities
Zooming in on the latest balance sheet data, we can see that Zinc Media Group had liabilities of UK£7.11m due within 12 months and liabilities of UK£4.84m due beyond that. Offsetting this, it had UK£6.81m in cash and UK£3.92m in receivables that were due within 12 months. So its liabilities total UK£1.24m more than the combination of its cash and short-term receivables.
Of course, Zinc Media Group has a market capitalization of UK£9.42m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Zinc Media Group also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zinc Media Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Zinc Media Group made a loss at the EBIT level, and saw its revenue drop to UK£20m, which is a fall of 29%. To be frank that doesn't bode well.