Is Ten Entertainment Group (LON:TEG) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Ten Entertainment Group plc (LON:TEG) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ten Entertainment Group

What Is Ten Entertainment Group's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Ten Entertainment Group had debt of UK£14.5m, up from UK£6.11m in one year. However, because it has a cash reserve of UK£7.39m, its net debt is less, at about UK£7.15m.

How Strong Is Ten Entertainment Group's Balance Sheet?

We can see from the most recent balance sheet that Ten Entertainment Group had liabilities of UK£42.3m falling due within a year, and liabilities of UK£172.6m due beyond that. Offsetting this, it had UK£7.39m in cash and UK£3.97m in receivables that were due within 12 months. So its liabilities total UK£203.6m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of UK£153.8m, we think shareholders really should watch Ten Entertainment Group's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Ten Entertainment Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Ten Entertainment Group made a loss at the EBIT level, and saw its revenue drop to UK£36m, which is a fall of 57%. To be frank that doesn't bode well.

Caveat Emptor

While Ten Entertainment Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable UK£16m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of UK£8.2m over the last twelve months. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Ten Entertainment Group is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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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