Is Transmit Entertainment (HKG:1326) A Risky Investment?

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. We note that Transmit Entertainment Limited (HKG:1326) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Transmit Entertainment

What Is Transmit Entertainment's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Transmit Entertainment had debt of HK$198.2m, up from HK$173.3m in one year. However, because it has a cash reserve of HK$111.8m, its net debt is less, at about HK$86.3m.

How Healthy Is Transmit Entertainment's Balance Sheet?

We can see from the most recent balance sheet that Transmit Entertainment had liabilities of HK$551.8m falling due within a year, and liabilities of HK$249.1m due beyond that. Offsetting these obligations, it had cash of HK$111.8m as well as receivables valued at HK$87.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$601.3m.

The deficiency here weighs heavily on the HK$150.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Transmit Entertainment would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Transmit Entertainment will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Transmit Entertainment made a loss at the EBIT level, and saw its revenue drop to HK$195m, which is a fall of 78%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Transmit Entertainment's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$96m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of HK$120m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Transmit Entertainment .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.