Is iCandy Interactive (ASX:ICI) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that iCandy Interactive Limited (ASX:ICI) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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, 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 iCandy Interactive

What Is iCandy Interactive's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 iCandy Interactive had AU$5.98m of debt, an increase on AU$4.47m, over one year. However, it does have AU$7.17m in cash offsetting this, leading to net cash of AU$1.18m.

How Strong Is iCandy Interactive's Balance Sheet?

We can see from the most recent balance sheet that iCandy Interactive had liabilities of AU$6.89m falling due within a year, and liabilities of AU$2.51m due beyond that. On the other hand, it had cash of AU$7.17m and AU$4.23m worth of receivables due within a year. So it can boast AU$2.00m more liquid assets than total liabilities.

This short term liquidity is a sign that iCandy Interactive could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that iCandy Interactive has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is iCandy Interactive'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, iCandy Interactive made a loss at the EBIT level, and saw its revenue drop to AU$26m, which is a fall of 10%. We would much prefer see growth.

So How Risky Is iCandy Interactive?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months iCandy Interactive lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$13m of cash and made a loss of AU$13m. Given it only has net cash of AU$1.18m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 3 warning signs with iCandy Interactive (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.