MultiChoice Group (JSE: MCG) Seems to Use Debt Quite Wisely


Legendary fund manager Li Lu (who 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 is 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 should shareholders be concerned about its use of debt?

When is debt dangerous?

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. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

Check out our latest analysis for MultiChoice Group

What is the debt of the MultiChoice group?

The image below, which you can click for more details, shows that in March 2021, MultiChoice Group was in debt of Rand 1.90 billion, up from Rand 263.0 million in a year. However, he has R8.54b in cash offsetting this, leading to a net cash of R6.64b.

JSE: MCG History of debt to equity July 8, 2021

A look at the responsibilities of the MultiChoice group

Zooming in on the latest balance sheet data, we can see that MultiChoice Group had a liability of R18.6b due within 12 months and a liability of R14.3b due beyond. On the other hand, he had a cash position of 8.54 billion rand and 3.35 billion rand in receivables due within one year. Thus, its liabilities total R20.9 billion more than the combination of its cash and short-term receivables.

MultiChoice Group has a market cap of R51.2b, so it could most likely raise funds to improve its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay debts. Despite its notable liabilities, MultiChoice Group has a net cash flow, so it’s fair to say it doesn’t have a lot of debt!

Also positive, MultiChoice Group has increased its EBIT by 27% over the past year, which should make it easier to repay debt in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine MultiChoice Group’s ability to maintain a healthy balance sheet going forward. 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. While MultiChoice Group has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building ( or erodes) this cash balance. Over the past three years, MultiChoice Group has generated strong free cash flow equivalent to 72% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.

In summary

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 6.64b. And it has impressed us with its EBIT growth of 27% over the past year. 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. Note that MultiChoice Group displays 1 warning sign in our investment analysis , you must know…

If you are interested in investing in companies that can generate profits without the burden of debt, check out this page. free list of growing companies that have net cash on the balance sheet.

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