Mei Ah Entertainment Group (HKG:391) Is Carrying A Fair Bit Of Debt

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.' 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. We note that Mei Ah Entertainment Group Limited (HKG:391) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Mei Ah Entertainment Group

How Much Debt Does Mei Ah Entertainment Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Mei Ah Entertainment Group had HK$126.7m of debt, an increase on HK$116.2m, over one year. However, it also had HK$25.8m in cash, and so its net debt is HK$100.9m.

How Healthy Is Mei Ah Entertainment Group's Balance Sheet?

According to the last reported balance sheet, Mei Ah Entertainment Group had liabilities of HK$135.0m due within 12 months, and liabilities of HK$212.7m due beyond 12 months. Offsetting this, it had HK$25.8m in cash and HK$34.9m in receivables that were due within 12 months. So its liabilities total HK$287.0m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of HK$414.7m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Mei Ah Entertainment 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.

In the last year Mei Ah Entertainment Group wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to HK$138m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Mei Ah Entertainment Group still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at HK$29m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$13m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Mei Ah Entertainment Group , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.