Is Tian Ge Interactive Holdings (HKG:1980) 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.' 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. We note that Tian Ge Interactive Holdings Limited (HKG:1980) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tian Ge Interactive Holdings

What Is Tian Ge Interactive Holdings's Debt?

As you can see below, at the end of June 2022, Tian Ge Interactive Holdings had CN¥436.6m of debt, up from CN¥397.6m a year ago. Click the image for more detail. But it also has CN¥1.50b in cash to offset that, meaning it has CN¥1.06b net cash.

How Strong Is Tian Ge Interactive Holdings' Balance Sheet?

We can see from the most recent balance sheet that Tian Ge Interactive Holdings had liabilities of CN¥603.7m falling due within a year, and liabilities of CN¥31.0m due beyond that. Offsetting this, it had CN¥1.50b in cash and CN¥70.8m in receivables that were due within 12 months. So it actually has CN¥936.7m more liquid assets than total liabilities.

This surplus liquidity suggests that Tian Ge Interactive Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Tian Ge Interactive Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Tian Ge Interactive Holdings'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.

In the last year Tian Ge Interactive Holdings had a loss before interest and tax, and actually shrunk its revenue by 31%, to CN¥179m. That makes us nervous, to say the least.

So How Risky Is Tian Ge Interactive Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Tian Ge Interactive Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥97m and booked a CN¥356m accounting loss. Given it only has net cash of CN¥1.06b, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Tian Ge Interactive Holdings (including 2 which are potentially serious) .

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.