Yahoo Finance Market Herald (ASX:TMH) Could Easily Take On More Debt
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that The Market Herald Limited (ASX:TMH) 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Market Herald
How Much Debt Does Market Herald Carry?
You can click the graphic below for the historical numbers, but it shows that Market Herald had AU$8.34m of debt in December 2021, down from AU$9.89m, one year before. But it also has AU$17.0m in cash to offset that, meaning it has AU$8.64m net cash.
How Healthy Is Market Herald's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Market Herald had liabilities of AU$11.1m due within 12 months and liabilities of AU$12.4m due beyond that. Offsetting this, it had AU$17.0m in cash and AU$2.92m in receivables that were due within 12 months. So its liabilities total AU$3.65m more than the combination of its cash and short-term receivables.
Of course, Market Herald has a market capitalization of AU$78.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Market Herald also has more cash than debt, so we're pretty confident it can manage its debt safely.
And we also note warmly that Market Herald grew its EBIT by 19% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Market Herald 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Market Herald 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. During the last two years, Market Herald produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Market Herald has AU$8.64m in net cash. And it impressed us with free cash flow of AU$2.5m, being 74% of its EBIT. So we don't think Market Herald's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Market Herald , 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.
