Here's Why iCandy Interactive (ASX:ICI) Can Manage Its Debt Despite Losing Money

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies iCandy Interactive Limited (ASX:ICI) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for iCandy Interactive

What Is iCandy Interactive's Net Debt?

The image below, which you can click on for greater detail, shows that iCandy Interactive had debt of AU$7.03m at the end of June 2023, a reduction from AU$9.62m over a year. But on the other hand it also has AU$9.29m in cash, leading to a AU$2.27m net cash position.

How Healthy Is iCandy Interactive's Balance Sheet?

According to the last reported balance sheet, iCandy Interactive had liabilities of AU$5.85m due within 12 months, and liabilities of AU$4.66m due beyond 12 months. Offsetting these obligations, it had cash of AU$9.29m as well as receivables valued at AU$8.52m due within 12 months. So it actually has AU$7.30m more liquid assets than total liabilities.

This excess liquidity suggests that iCandy Interactive is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, iCandy Interactive boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since iCandy Interactive will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, iCandy Interactive reported revenue of AU$26m, which is a gain of 55%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is iCandy Interactive?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that iCandy Interactive had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$18m and booked a AU$6.8m accounting loss. With only AU$2.27m on the balance sheet, it would appear that its going to need to raise capital again soon. iCandy Interactive's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for iCandy Interactive (2 are a bit unpleasant) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.