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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that International Entertainment Corporation (HKG:1009) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for International Entertainment
What Is International Entertainment's Debt?
As you can see below, at the end of June 2024, International Entertainment had HK$1.08b of debt, up from HK$468.0m a year ago. Click the image for more detail. However, because it has a cash reserve of HK$422.0m, its net debt is less, at about HK$653.8m.
How Healthy Is International Entertainment's Balance Sheet?
We can see from the most recent balance sheet that International Entertainment had liabilities of HK$600.6m falling due within a year, and liabilities of HK$706.9m due beyond that. On the other hand, it had cash of HK$422.0m and HK$98.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$787.3m.
This deficit is considerable relative to its market capitalization of HK$1.11b, so it does suggest shareholders should keep an eye on International Entertainment's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is International Entertainment's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, International Entertainment saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
Caveat Emptor
Importantly, International Entertainment had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at HK$81m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through HK$38m of cash over the last year. So to be blunt we think it is risky. For riskier companies like International Entertainment I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.