Linekong Interactive Group (HKG:8267) Has Debt But No Earnings; Should You Worry?

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.' 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. As with many other companies Linekong Interactive Group Co., Ltd. (HKG:8267) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Linekong Interactive Group

How Much Debt Does Linekong Interactive Group Carry?

The image below, which you can click on for greater detail, shows that Linekong Interactive Group had debt of CN¥50.0m at the end of June 2022, a reduction from CN¥100.0m over a year. But on the other hand it also has CN¥158.8m in cash, leading to a CN¥108.8m net cash position.

A Look At Linekong Interactive Group's Liabilities

The latest balance sheet data shows that Linekong Interactive Group had liabilities of CN¥160.6m due within a year, and liabilities of CN¥2.86m falling due after that. Offsetting this, it had CN¥158.8m in cash and CN¥9.81m in receivables that were due within 12 months. So it actually has CN¥5.21m more liquid assets than total liabilities.

This short term liquidity is a sign that Linekong Interactive Group could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 it is Linekong Interactive Group'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, Linekong Interactive Group made a loss at the EBIT level, and saw its revenue drop to CN¥82m, which is a fall of 47%. That makes us nervous, to say the least.

So How Risky Is Linekong Interactive Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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¥22m of cash and made a loss of CN¥95m. But the saving grace is the CN¥108.8m on the balance sheet. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Linekong Interactive Group , and understanding them should be part of your investment process.

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.