The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that MediaCo Holding Inc. (NASDAQ:MDIA) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 MediaCo Holding
What Is MediaCo Holding’s Debt?
The image below, which you can click on for greater detail, shows that MediaCo Holding had debt of US$5.95m at the end of June 2023, a reduction from US$100.4m over a year. However, its balance sheet shows it holds US$6.89m in cash, so it actually has US$940.0k net cash.
How Strong Is MediaCo Holding’s Balance Sheet?
According to the last reported balance sheet, MediaCo Holding had liabilities of US$6.75m due within 12 months, and liabilities of US$23.2m due beyond 12 months. Offsetting this, it had US$6.89m in cash and US$8.43m in receivables that were due within 12 months. So it has liabilities totalling US$14.6m more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of US$17.0m, so it does suggest shareholders should keep an eye on MediaCo Holding’s use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, MediaCo Holding boasts net cash, so it’s fair to say it does not have a heavy debt load! There’s no doubt that we learn most about debt from the balance sheet. But it is MediaCo Holding’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 MediaCo Holding had a loss before interest and tax, and actually shrunk its revenue by 2.3%, to US$37m. That’s not what we would hope to see.
So How Risky Is MediaCo Holding?
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 MediaCo Holding lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$6.3m of cash and made a loss of US$9.6m. With only US$940.0k on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we’d say the stock is a bit risky, and we’re usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example MediaCo Holding has 5 warning signs (and 3 which are a bit unpleasant) we think you should know about.
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.
What are the risks and opportunities for MediaCo Holding?
Earnings have declined by 9.7% per year over past 5 years
Has less than 1 year of cash runway
Highly volatile share price over the past 3 months
Does not have a meaningful market cap ($15M)
Shareholders have been diluted in the past year
View all Risks and Rewards
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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.