Is iCandy Interactive (ASX:ICI) A Risky Investment?

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. We can see that iCandy Interactive Limited (ASX:ICI) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for iCandy Interactive

What Is iCandy Interactive's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 iCandy Interactive had AU$4.47m of debt, an increase on none, over one year. But it also has AU$18.7m in cash to offset that, meaning it has AU$14.3m net cash.

A Look At iCandy Interactive's Liabilities

Zooming in on the latest balance sheet data, we can see that iCandy Interactive had liabilities of AU$6.73m due within 12 months and liabilities of AU$3.58m due beyond that. Offsetting this, it had AU$18.7m in cash and AU$6.67m in receivables that were due within 12 months. So it actually has AU$15.1m more liquid assets than total liabilities.

It's good to see that iCandy Interactive has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that iCandy Interactive has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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$29m, which is a gain of 1,400%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is iCandy Interactive?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$3.9m and booked a AU$1.5m accounting loss. With only AU$14.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, iCandy Interactive's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with iCandy Interactive , and understanding them should be part of your investment process.

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.