Is International Entertainment (HKG:1009) Using Too Much Debt?

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. We note that International Entertainment Corporation (HKG:1009) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for International Entertainment

What Is International Entertainment's Net Debt?

The chart below, which you can click on for greater detail, shows that International Entertainment had HK$469.8m in debt in December 2021; about the same as the year before. However, its balance sheet shows it holds HK$571.7m in cash, so it actually has HK$101.9m 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$443.3m due within 12 months and liabilities of HK$254.4m due beyond that. Offsetting these obligations, it had cash of HK$571.7m as well as receivables valued at HK$36.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$89.5m.

This deficit isn't so bad because International Entertainment is worth HK$277.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, International Entertainment also has more cash than debt, so we're pretty confident it can manage its debt safely. 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.

In the last year International Entertainment had a loss before interest and tax, and actually shrunk its revenue by 46%, to HK$54m. To be frank that doesn't bode well.

So How Risky Is International Entertainment?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year International Entertainment had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$20m and booked a HK$288m accounting loss. With only HK$101.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example, we've discovered 3 warning signs for International Entertainment (1 is potentially serious!) that you should be aware of before investing here.

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.

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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.