Strawbear Entertainment Group (HKG:2125) Is Making Moderate Use Of Debt

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.' 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 Strawbear Entertainment Group (HKG:2125) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Strawbear Entertainment Group

What Is Strawbear Entertainment Group's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Strawbear Entertainment Group had debt of CN¥306.7m, up from CN¥276.0m in one year. On the flip side, it has CN¥185.5m in cash leading to net debt of about CN¥121.2m.

A Look At Strawbear Entertainment Group's Liabilities

We can see from the most recent balance sheet that Strawbear Entertainment Group had liabilities of CN¥810.3m falling due within a year, and liabilities of CN¥34.0m due beyond that. Offsetting these obligations, it had cash of CN¥185.5m as well as receivables valued at CN¥590.3m due within 12 months. So it has liabilities totalling CN¥68.5m more than its cash and near-term receivables, combined.

Since publicly traded Strawbear Entertainment Group shares are worth a total of CN¥347.0m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Strawbear Entertainment Group will need earnings to service that debt. 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.

In the last year Strawbear Entertainment Group had a loss before interest and tax, and actually shrunk its revenue by 14%, to CN¥841m. That's not what we would hope to see.

Caveat Emptor

While Strawbear Entertainment Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥119m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥56m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Be aware that Strawbear Entertainment Group is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.