Transmit Entertainment (HKG:1326) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Transmit Entertainment Limited (HKG:1326) makes use of debt. But is this debt a concern to shareholders?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Transmit Entertainment

How Much Debt Does Transmit Entertainment Carry?

The image below, which you can click on for greater detail, shows that Transmit Entertainment had debt of HK$316.3m at the end of December 2020, a reduction from HK$393.3m over a year. However, because it has a cash reserve of HK$175.2m, its net debt is less, at about HK$141.1m.

A Look At Transmit Entertainment's Liabilities

According to the last reported balance sheet, Transmit Entertainment had liabilities of HK$1.04b due within 12 months, and liabilities of HK$902.9m due beyond 12 months. Offsetting these obligations, it had cash of HK$175.2m as well as receivables valued at HK$127.2m due within 12 months. So its liabilities total HK$1.64b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$340.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Transmit Entertainment would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Transmit Entertainment'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, Transmit Entertainment made a loss at the EBIT level, and saw its revenue drop to HK$320m, which is a fall of 45%. 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). Its EBIT loss was a whopping HK$157m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of HK$187m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. 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. Case in point: We've spotted 2 warning signs for Transmit Entertainment you should be aware of, and 1 of them makes us a bit uncomfortable.

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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