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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 can see that International Entertainment Corporation (HKG:1009) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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

How Much Debt Does International Entertainment Carry?

As you can see below, International Entertainment had HK$479.8m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has HK$617.5m in cash, leading to a HK$137.7m net cash position.

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$436.2m due within 12 months and liabilities of HK$273.3m due beyond that. Offsetting this, it had HK$617.5m in cash and HK$40.3m in receivables that were due within 12 months. So its liabilities total HK$51.7m more than the combination of its cash and short-term receivables.

Given International Entertainment has a market capitalization of HK$403.9m, it's hard to believe these liabilities pose much 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! When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year International Entertainment had a loss before interest and tax, and actually shrunk its revenue by 71%, to HK$64m. That makes us nervous, to say the least.

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. And over the same period it saw negative free cash outflow of HK$9.8m and booked a HK$242m accounting loss. Given it only has net cash of HK$137.7m, the company may need to raise more capital if it doesn't reach break-even 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 4 warning signs for International Entertainment (1 is a bit concerning!) that you should be aware of before investing here.

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.

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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.