International Entertainment (HKG:1009) Has Debt But No Earnings; Should You Worry?

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.' 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. As with many other companies International Entertainment Corporation (HKG:1009) makes use of debt. But should shareholders be worried about its use of debt?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for International Entertainment

What Is International Entertainment's Debt?

As you can see below, International Entertainment had HK$444.6m of debt at December 2022, down from HK$469.8m a year prior. However, it does have HK$462.3m in cash offsetting this, leading to net cash of HK$17.7m.

A Look At International Entertainment's Liabilities

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. On the other hand, it had cash of HK$462.3m and HK$110.0m worth of receivables due within a year. So its liabilities total HK$85.3m more than the combination of its cash and short-term receivables.

International Entertainment has a market capitalization of HK$273.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, International Entertainment 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 International Entertainment 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, International Entertainment reported revenue of HK$145m, which is a gain of 171%, 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?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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$763k 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. The good news for shareholders is that International Entertainment has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with International Entertainment (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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.