Yahoo Finance Is Mediagrif Interactive Technologies (TSE:MDF) A Risky Investment?
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. We note that Mediagrif Interactive Technologies Inc. (TSE:MDF) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Mediagrif Interactive Technologies
What Is Mediagrif Interactive Technologies's Net Debt?
The image below, which you can click on for greater detail, shows that Mediagrif Interactive Technologies had debt of CA$13.1m at the end of June 2019, a reduction from CA$26.9m over a year. However, its balance sheet shows it holds CA$17.0m in cash, so it actually has CA$3.90m net cash.
How Strong Is Mediagrif Interactive Technologies's Balance Sheet?
The latest balance sheet data shows that Mediagrif Interactive Technologies had liabilities of CA$30.2m due within a year, and liabilities of CA$29.4m falling due after that. Offsetting these obligations, it had cash of CA$17.0m as well as receivables valued at CA$12.9m due within 12 months. So its liabilities total CA$29.6m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Mediagrif Interactive Technologies is worth CA$84.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Mediagrif Interactive Technologies also has more cash than debt, so we're pretty confident it can manage its debt safely.
On the other hand, Mediagrif Interactive Technologies's EBIT dived 10%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mediagrif Interactive Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Mediagrif Interactive Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Mediagrif Interactive Technologies recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
Summing up
Although Mediagrif Interactive Technologies's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CA$3.9m. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in CA$6.5m. So we are not troubled with Mediagrif Interactive Technologies's debt use. We'd be motivated to research the stock further if we found out that Mediagrif Interactive Technologies insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
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.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.
