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. Importantly, Network Media Group Inc. (CVE:NTE) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Network Media Group

What Is Network Media Group's Net Debt?

The image below, which you can click on for greater detail, shows that at May 2019 Network Media Group had debt of CA$3.43m, up from CA$2.55m in one year. However, it does have CA$1.00m in cash offsetting this, leading to net debt of about CA$2.43m.

How Healthy Is Network Media Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Network Media Group had liabilities of CA$15.7m due within 12 months and liabilities of CA$72.9k due beyond that. Offsetting this, it had CA$1.00m in cash and CA$4.28m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$10.5m.

This deficit is considerable relative to its market capitalization of CA$11.3m, so it does suggest shareholders should keep an eye on Network Media Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.