Is International Entertainment (HKG:1009) Weighed On By Its Debt Load?

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 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 real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for International Entertainment

How Much Debt Does International Entertainment Carry?

The chart below, which you can click on for greater detail, shows that International Entertainment had HK$456.8m in debt in December 2020; about the same as the year before. However, its balance sheet shows it holds HK$683.0m in cash, so it actually has HK$226.2m net cash.

How Healthy Is International Entertainment's Balance Sheet?

The latest balance sheet data shows that International Entertainment had liabilities of HK$442.5m due within a year, and liabilities of HK$310.1m falling due after that. Offsetting this, it had HK$683.0m in cash and HK$50.7m in receivables that were due within 12 months. So its liabilities total HK$18.9m more than the combination of its cash and short-term receivables.

Of course, International Entertainment has a market capitalization of HK$540.7m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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. 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 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 62%, to HK$100m. 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 we do note that International Entertainment had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$14m of cash and made a loss of HK$382m. Given it only has net cash of HK$226.2m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Case in point: We've spotted 3 warning signs for International Entertainment you should be aware of, and 1 of them is potentially serious.

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. 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.
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