Is 37 Interactive Entertainment Network Technology Group (SZSE:002555) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies 37 Interactive Entertainment Network Technology Group Co., Ltd. (SZSE:002555) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for 37 Interactive Entertainment Network Technology Group

How Much Debt Does 37 Interactive Entertainment Network Technology Group Carry?

The image below, which you can click on for greater detail, shows that at March 2024 37 Interactive Entertainment Network Technology Group had debt of CN¥2.86b, up from CN¥2.01b in one year. But on the other hand it also has CN¥10.2b in cash, leading to a CN¥7.29b net cash position.

A Look At 37 Interactive Entertainment Network Technology Group's Liabilities

Zooming in on the latest balance sheet data, we can see that 37 Interactive Entertainment Network Technology Group had liabilities of CN¥6.91b due within 12 months and liabilities of CN¥418.4m due beyond that. Offsetting these obligations, it had cash of CN¥10.2b as well as receivables valued at CN¥1.56b due within 12 months. So it can boast CN¥4.39b more liquid assets than total liabilities.

This surplus suggests that 37 Interactive Entertainment Network Technology Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that 37 Interactive Entertainment Network Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, 37 Interactive Entertainment Network Technology Group's EBIT dived 14%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine 37 Interactive Entertainment Network Technology Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 37 Interactive Entertainment Network Technology Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, 37 Interactive Entertainment Network Technology Group generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case 37 Interactive Entertainment Network Technology Group has CN¥7.29b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.6b, being 92% of its EBIT. So is 37 Interactive Entertainment Network Technology Group's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for 37 Interactive Entertainment Network Technology Group that you should be aware of before investing here.

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.

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