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. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, MacroWell OMG Digital Entertainment Co., Ltd. (GTSM:3687) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is MacroWell OMG Digital Entertainment’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 MacroWell OMG Digital Entertainment had NT$61.6m of debt, an increase on NT$80.0, over one year. However, it does have NT$873.2m in cash offsetting this, leading to net cash of NT$811.6m.
How Strong Is MacroWell OMG Digital Entertainment’s Balance Sheet?
We can see from the most recent balance sheet that MacroWell OMG Digital Entertainment had liabilities of NT$2.40b falling due within a year, and liabilities of NT$125.8m due beyond that. Offsetting these obligations, it had cash of NT$873.2m as well as receivables valued at NT$2.14b due within 12 months. So it can boast NT$485.5m more liquid assets than total liabilities.
This luscious liquidity implies that MacroWell OMG Digital Entertainment’s balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, MacroWell OMG Digital Entertainment boasts net cash, so it’s fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, MacroWell OMG Digital Entertainment turned things around in the last 12 months, delivering and EBIT of NT$44m. There’s no doubt that we learn most about debt from the balance sheet. But you can’t view debt in total isolation; since MacroWell OMG Digital Entertainment will need earnings to service that debt. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While MacroWell OMG Digital 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. Looking at the most recent year, MacroWell OMG Digital Entertainment recorded free cash flow of 38% of its EBIT, which is weaker than we’d expect. That weak cash conversion makes it more difficult to handle indebtedness.
While it is always sensible to investigate a company’s debt, in this case MacroWell OMG Digital Entertainment has NT$811.6m in net cash and a decent-looking balance sheet. So is MacroWell OMG Digital Entertainment’s debt a risk? It doesn’t seem so to us. Even though MacroWell OMG Digital Entertainment lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
If you spot an error that warrants correction, please contact the editor at email@example.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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
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