Is Meta Media Holdings (HKG:72) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Meta Media Holdings Limited (HKG:72) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Meta Media Holdings

How Much Debt Does Meta Media Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Meta Media Holdings had CN¥172.1m of debt in June 2024, down from CN¥185.7m, one year before. However, it does have CN¥32.9m in cash offsetting this, leading to net debt of about CN¥139.2m.

A Look At Meta Media Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Meta Media Holdings had liabilities of CN¥302.9m due within 12 months and liabilities of CN¥27.3m due beyond that. Offsetting this, it had CN¥32.9m in cash and CN¥144.5m in receivables that were due within 12 months. So it has liabilities totalling CN¥152.9m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥80.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Meta Media Holdings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Meta Media Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Meta Media Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 7.0%, to CN¥384m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Meta Media Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥15m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CN¥30m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Meta Media Holdings you should be aware of, and 1 of them doesn't sit too well with us.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.