Tian Ge Interactive Holdings (HKG:1980) Has Debt But No Earnings; Should You Worry?

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 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 note that Tian Ge Interactive Holdings Limited (HKG:1980) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Tian Ge Interactive Holdings

What Is Tian Ge Interactive Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Tian Ge Interactive Holdings had debt of CN¥318.6m, up from CN¥287.2m in one year. However, it does have CN¥1.08b in cash offsetting this, leading to net cash of CN¥762.3m.

How Healthy 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¥506.7m falling due within a year, and liabilities of CN¥26.2m due beyond that. On the other hand, it had cash of CN¥1.08b and CN¥10.2m worth of receivables due within a year. So it can boast CN¥558.1m more liquid assets than total liabilities.

This luscious liquidity implies that Tian Ge Interactive Holdings' balance sheet is sturdy like a giant sequoia tree. 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. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Tian Ge Interactive Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥142m, which is a fall of 33%. To be frank that doesn't bode well.

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. Indeed, in that time it burnt through CN¥43m of cash and made a loss of CN¥533m. With only CN¥762.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Tian Ge Interactive Holdings (2 make us uncomfortable) you should be aware of.

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.