Yahoo Finance Does One Media iP Group (LON:OMIP) Have A Healthy Balance Sheet?
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.' 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. Importantly, One Media iP Group Plc (LON:OMIP) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for One Media iP Group
What Is One Media iP Group's Net Debt?
As you can see below, One Media iP Group had UK£1.77m of debt, at April 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds UK£2.14m in cash, so it actually has UK£368.3k net cash.
A Look At One Media iP Group's Liabilities
Zooming in on the latest balance sheet data, we can see that One Media iP Group had liabilities of UK£1.19m due within 12 months and liabilities of UK£1.77m due beyond that. Offsetting these obligations, it had cash of UK£2.14m as well as receivables valued at UK£1.44m due within 12 months. So it actually has UK£618.6k more liquid assets than total liabilities.
This surplus suggests that One Media iP Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that One Media iP Group has more cash than debt is arguably a good indication that it can manage its debt safely.
Another good sign is that One Media iP Group has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if One Media iP Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. One Media iP Group 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. During the last three years, One Media iP Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While it is always sensible to investigate a company's debt, in this case One Media iP Group has UK£368.3k in net cash and a decent-looking balance sheet. And we liked the look of last year's 25% year-on-year EBIT growth. So we are not troubled with One Media iP Group's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for One Media iP Group (of which 1 is a bit concerning!) 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
