Is T4F Entretenimento (BVMF:SHOW3) A Risky Investment?

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. Importantly, T4F Entretenimento S.A. (BVMF:SHOW3) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

Check out our latest analysis for T4F Entretenimento

What Is T4F Entretenimento's Debt?

The chart below, which you can click on for greater detail, shows that T4F Entretenimento had R$126.1m in debt in March 2022; about the same as the year before. However, its balance sheet shows it holds R$182.5m in cash, so it actually has R$56.4m net cash.

How Healthy Is T4F Entretenimento's Balance Sheet?

According to the last reported balance sheet, T4F Entretenimento had liabilities of R$290.6m due within 12 months, and liabilities of R$136.5m due beyond 12 months. Offsetting these obligations, it had cash of R$182.5m as well as receivables valued at R$130.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$113.7m.

While this might seem like a lot, it is not so bad since T4F Entretenimento has a market capitalization of R$255.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, T4F Entretenimento also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is T4F Entretenimento'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, T4F Entretenimento reported revenue of R$207m, which is a gain of 1,930%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is T4F Entretenimento?

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 T4F Entretenimento lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through R$20m of cash and made a loss of R$47m. But the saving grace is the R$56.4m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Importantly, T4F Entretenimento's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for T4F Entretenimento (of which 1 is concerning!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.