Is Icon Culture Global (HKG:8500) Using Too Much Debt?

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, Icon Culture Global Company Limited (HKG:8500) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Icon Culture Global

What Is Icon Culture Global's Debt?

As you can see below, at the end of June 2023, Icon Culture Global had CN¥15.0m of debt, up from CN¥10.0m a year ago. Click the image for more detail. However, it does have CN¥1.31m in cash offsetting this, leading to net debt of about CN¥13.7m.

A Look At Icon Culture Global's Liabilities

According to the last reported balance sheet, Icon Culture Global had liabilities of CN¥53.6m due within 12 months, and liabilities of CN¥187.0k due beyond 12 months. On the other hand, it had cash of CN¥1.31m and CN¥100.4m worth of receivables due within a year. So it actually has CN¥48.0m more liquid assets than total liabilities.

This luscious liquidity implies that Icon Culture Global's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Icon Culture Global will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Icon Culture Global made a loss at the EBIT level, and saw its revenue drop to CN¥32m, which is a fall of 70%. That makes us nervous, to say the least.

Caveat Emptor

While Icon Culture Global's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥24m at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That should give the business time to grow its cashflow. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. To that end, you should learn about the 4 warning signs we've spotted with Icon Culture Global (including 3 which can't be ignored) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.