Is Tian Ge Interactive Holdings (HKG:1980) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Tian Ge Interactive Holdings Limited (HKG:1980) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Tian Ge Interactive Holdings

How Much Debt Does Tian Ge Interactive Holdings Carry?

The image below, which you can click on for greater detail, shows that Tian Ge Interactive Holdings had debt of CN¥135.1m at the end of December 2023, a reduction from CN¥318.6m over a year. But it also has CN¥948.7m in cash to offset that, meaning it has CN¥813.6m net cash.

How Strong Is Tian Ge Interactive Holdings' Balance Sheet?

The latest balance sheet data shows that Tian Ge Interactive Holdings had liabilities of CN¥284.9m due within a year, and liabilities of CN¥22.2m falling due after that. Offsetting these obligations, it had cash of CN¥948.7m as well as receivables valued at CN¥3.40m due within 12 months. So it actually has CN¥645.0m 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. Succinctly put, Tian Ge Interactive Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Tian Ge Interactive Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Tian Ge Interactive Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥68m, which is a fall of 52%. That makes us nervous, to say the least.

So How Risky Is Tian Ge Interactive Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Tian Ge Interactive Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥43m of cash and made a loss of CN¥135m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥813.6m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Tian Ge Interactive Holdings you should be aware of, and 2 of them can't be ignored.

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. 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.