Is Linekong Interactive Group (HKG:8267) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Linekong Interactive Group Co., Ltd. (HKG:8267) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Linekong Interactive Group

How Much Debt Does Linekong Interactive Group Carry?

As you can see below, Linekong Interactive Group had CN¥100.0m of debt at June 2021, down from CN¥149.1m a year prior. But on the other hand it also has CN¥172.6m in cash, leading to a CN¥72.6m net cash position.

A Look At Linekong Interactive Group's Liabilities

According to the last reported balance sheet, Linekong Interactive Group had liabilities of CN¥174.4m due within 12 months, and liabilities of CN¥4.63m due beyond 12 months. Offsetting these obligations, it had cash of CN¥172.6m as well as receivables valued at CN¥35.1m due within 12 months. So it can boast CN¥28.7m more liquid assets than total liabilities.

It's good to see that Linekong Interactive Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Linekong Interactive Group 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 you can't view debt in total isolation; since Linekong Interactive 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.

Over 12 months, Linekong Interactive Group made a loss at the EBIT level, and saw its revenue drop to CN¥153m, which is a fall of 33%. That makes us nervous, to say the least.

So How Risky Is Linekong Interactive Group?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Linekong Interactive Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥13m of cash and made a loss of CN¥53m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥72.6m. That means it could keep spending at its current rate for more than two years. 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. We've identified 2 warning signs with Linekong Interactive Group , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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