We Think T3 Entertainment (KOSDAQ:204610) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that T3 Entertainment Inc. (KOSDAQ:204610) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for T3 Entertainment

What Is T3 Entertainment's Debt?

You can click the graphic below for the historical numbers, but it shows that T3 Entertainment had ₩4.23b of debt in March 2024, down from ₩10.3b, one year before. But it also has ₩79.3b in cash to offset that, meaning it has ₩75.1b net cash.

A Look At T3 Entertainment's Liabilities

Zooming in on the latest balance sheet data, we can see that T3 Entertainment had liabilities of ₩21.3b due within 12 months and liabilities of ₩2.58b due beyond that. Offsetting these obligations, it had cash of ₩79.3b as well as receivables valued at ₩10.9b due within 12 months. So it can boast ₩66.3b more liquid assets than total liabilities.

This surplus liquidity suggests that T3 Entertainment's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, T3 Entertainment boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that T3 Entertainment's load is not too heavy, because its EBIT was down 32% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since T3 Entertainment will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. T3 Entertainment may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, T3 Entertainment's free cash flow amounted to 35% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case T3 Entertainment has ₩75.1b in net cash and a decent-looking balance sheet. So we don't have any problem with T3 Entertainment's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for T3 Entertainment (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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