These 4 Measures Indicate That Maoyan Entertainment (HKG:1896) Is Using Debt Reasonably Well
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Maoyan Entertainment (HKG:1896) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Maoyan Entertainment
What Is Maoyan Entertainment's Net Debt?
As you can see below, at the end of June 2019, Maoyan Entertainment had CN¥1.15b of debt, up from none a year ago. Click the image for more detail. But it also has CN¥3.08b in cash to offset that, meaning it has CN¥1.93b net cash.
How Strong Is Maoyan Entertainment's Balance Sheet?
We can see from the most recent balance sheet that Maoyan Entertainment had liabilities of CN¥3.28b falling due within a year, and liabilities of CN¥217.4m due beyond that. On the other hand, it had cash of CN¥3.08b and CN¥653.5m worth of receivables due within a year. So it can boast CN¥238.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Maoyan Entertainment could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Maoyan Entertainment boasts net cash, so it's fair to say it does not have a heavy debt load!
Although Maoyan Entertainment made a loss at the EBIT level, last year, it was also good to see that it generated CN¥456m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Maoyan Entertainment's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Maoyan Entertainment 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 year, Maoyan Entertainment burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Maoyan Entertainment has net cash of CN¥1.9b, as well as more liquid assets than liabilities. So we don't have any problem with Maoyan Entertainment's use of debt. We'd be motivated to research the stock further if we found out that Maoyan Entertainment insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
