Is International Entertainment (HKG:1009) Using Debt Sensibly?

Warren Buffett famously said, '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. Importantly, International Entertainment Corporation (HKG:1009) does carry debt. But the real question is whether this debt is making the company risky.

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for International Entertainment

What Is International Entertainment's Debt?

The image below, which you can click on for greater detail, shows that International Entertainment had debt of HK$444.6m at the end of December 2022, a reduction from HK$469.8m over a year. But it also has HK$462.3m in cash to offset that, meaning it has HK$17.7m net cash.

How Healthy Is International Entertainment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that International Entertainment had liabilities of HK$449.3m due within 12 months and liabilities of HK$208.4m due beyond that. Offsetting this, it had HK$462.3m in cash and HK$110.0m in receivables that were due within 12 months. So its liabilities total HK$85.3m more than the combination of its cash and short-term receivables.

Since publicly traded International Entertainment shares are worth a total of HK$848.9m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, International Entertainment boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is International Entertainment'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, International Entertainment reported revenue of HK$148m, which is a gain of 175%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is International Entertainment?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year International Entertainment had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$8.5m of cash and made a loss of HK$126m. With only HK$17.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, International Entertainment's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 International Entertainment , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.