These 4 measures indicate that the MultiChoice group (JSE: MCG) is using debt reasonably well
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital.” It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies MultiChoice Group Limited (JSE: MCG) uses debt. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. That said, the most common situation is where a business 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 flow and debt together.
Check out our latest analysis for MultiChoice Group
What is the net debt of the MultiChoice group?
You can click on the graph below for historical figures, but it shows that as of September 2021, MultiChoice Group had a debt of Rand 1.65 billion, an increase from Rand 572.0 million, on a year. But he also has 7.31 billion Rand in cash to make up for that, which means he has 5.66 billion Rand in net cash.
How healthy is the balance sheet of the MultiChoice group?
Zooming in on the latest balance sheet data, we can see that MultiChoice Group had a liability of R22.7 billion owed within 12 months and a liability of R12.9 billion owed beyond that. On the other hand, he had a cash position of 7.31 billion rand and 4.38 billion rand in receivables due within one year. Thus, its liabilities total R 24.0 billion more than the combination of its cash and short-term receivables.
MultiChoice Group has a market cap of R51.5b, so it could most likely raise cash to improve its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay your debt. Despite its notable liabilities, MultiChoice Group has a net cash flow, so it’s fair to say it doesn’t have a heavy debt load!
Another good thing is that MultiChoice Group has increased its EBIT to 17% over the past year, further increasing its ability to manage debt. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, the company’s future profitability will decide whether MultiChoice Group can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. The MultiChoice Group may have net cash on the balance sheet, but it is always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its profitability. ability to manage debt. Over the past three years, MultiChoice Group has generated strong free cash flow equivalent to 73% of its EBIT, roughly what we expected. This free cash flow puts the business in a good position to repay debt, if any.
Although MultiChoice Group’s balance sheet is not particularly strong, due to total liabilities it is clearly positive to see that it has a net cash position of 5.66b R. The icing on the cake is that it converted 73% of that EBIT into free cash flow, which brought in 8.5 bR. We therefore do not believe that the use of debt by MultiChoice Group is risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. We have identified 2 warning signs with MultiChoice Group and understanding them should be part of your investment process.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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