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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, Liquid Media Group Ltd. (NASDAQ:YVR) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Liquid Media Group's Debt?
As you can see below, Liquid Media Group had CA$1.92m of debt at August 2020, down from CA$4.01m a year prior. However, it does have CA$2.02m in cash offsetting this, leading to net cash of CA$99.3k.
A Look At Liquid Media Group's Liabilities
According to the balance sheet data, Liquid Media Group had liabilities of CA$3.38m due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of CA$2.02m as well as receivables valued at CA$197.9k due within 12 months. So it has liabilities totalling CA$1.16m more than its cash and near-term receivables, combined.
Of course, Liquid Media Group has a market capitalization of CA$21.8m, 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. Despite its noteworthy liabilities, Liquid Media Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Liquid 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.
Given it has no significant operating revenue at the moment, shareholders will be hoping Liquid Media Group can make progress and gain better traction for the business, before it runs low on cash.
So How Risky Is Liquid Media Group?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Liquid Media Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$10m and booked a CA$6.5m accounting loss. With only CA$99.3k on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Liquid Media Group has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 5 warning signs for Liquid Media Group (4 are a bit concerning!) that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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