Does Wayi International Digital Entertainment (GTSM:3086) Have A Healthy Balance Sheet?

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. As with many other companies Wayi International Digital Entertainment Co., Ltd. (GTSM:3086) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Wayi International Digital Entertainment

What Is Wayi International Digital Entertainment's Debt?

As you can see below, Wayi International Digital Entertainment had NT$112.2m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has NT$129.9m in cash to offset that, meaning it has NT$17.6m net cash.

A Look At Wayi International Digital Entertainment's Liabilities

We can see from the most recent balance sheet that Wayi International Digital Entertainment had liabilities of NT$134.7m falling due within a year, and liabilities of NT$30.5m due beyond that. On the other hand, it had cash of NT$129.9m and NT$13.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$21.5m.

Of course, Wayi International Digital Entertainment has a market capitalization of NT$389.8m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Wayi International Digital Entertainment also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Wayi International Digital 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 Wayi International Digital Entertainment had a loss before interest and tax, and actually shrunk its revenue by 25%, to NT$93m. To be frank that doesn't bode well.

So How Risky Is Wayi International Digital Entertainment?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Wayi International Digital 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 NT$35m and booked a NT$22m accounting loss. With only NT$17.6m on the balance sheet, it would appear that its going to need to raise capital again 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. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for Wayi International Digital Entertainment you should know about.

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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