Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Liquid Media Group Ltd. (NASDAQ:YVR) does carry debt. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
How Much Debt Does Liquid Media Group Carry?
The image below, which you can click on for greater detail, shows that at August 2019 Liquid Media Group had debt of CA$4.01m, up from CA$1.26m in one year. However, it does have CA$4.61m in cash offsetting this, leading to net cash of CA$600.7k.
How Strong Is Liquid Media Group's Balance Sheet?
The latest balance sheet data shows that Liquid Media Group had liabilities of CA$5.04m due within a year, and liabilities of CA$2.93m falling due after that. Offsetting these obligations, it had cash of CA$4.61m as well as receivables valued at CA$770.6k due within 12 months. So its liabilities total CA$2.59m more than the combination of its cash and short-term receivables.
Since publicly traded Liquid Media Group shares are worth a total of CA$16.6m, it seems unlikely that this level of liabilities would be a major threat. 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, Liquid Media Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Liquid Media Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Liquid Media Group made a loss at the EBIT level, and saw its revenue drop to CA$507k, which is a fall of 11%. That's not what we would hope to see.
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$3.1m and booked a CA$7.5m accounting loss. However, it has net cash of CA$600.7k, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Liquid Media Group insider transactions.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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