David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. 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. We note that Modern Media Holdings Limited (HKG:72) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Modern Media Holdings
What Is Modern Media Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Modern Media Holdings had CN¥107.1m of debt, an increase on CN¥92.7m, over one year. On the flip side, it has CN¥6.01m in cash leading to net debt of about CN¥101.1m.
A Look At Modern Media Holdings's Liabilities
Zooming in on the latest balance sheet data, we can see that Modern Media Holdings had liabilities of CN¥209.5m due within 12 months and liabilities of CN¥30.5m due beyond that. Offsetting this, it had CN¥6.01m in cash and CN¥183.4m in receivables that were due within 12 months. So its liabilities total CN¥50.6m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Modern Media Holdings has a market capitalization of CN¥120.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Modern Media Holdings 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, Modern Media Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥432m, which is a fall of 5.8%. We would much prefer see growth.