Is Wayi International Digital Entertainment (GTSM:3086) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Wayi International Digital Entertainment Co., Ltd. (GTSM:3086) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Wayi International Digital Entertainment

What Is Wayi International Digital Entertainment's Net 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. However, it does have NT$124.1m in cash offsetting this, leading to net cash of NT$11.8m.

How Healthy Is Wayi International Digital Entertainment's Balance Sheet?

According to the last reported balance sheet, Wayi International Digital Entertainment had liabilities of NT$134.7m due within 12 months, and liabilities of NT$30.5m due beyond 12 months. Offsetting this, it had NT$124.1m in cash and NT$13.9m in receivables that were due within 12 months. So it has liabilities totalling NT$27.3m more than its cash and near-term receivables, combined.

Having regard to Wayi International Digital Entertainment's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$3.49b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Wayi International Digital Entertainment boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Wayi International Digital 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 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?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Wayi International Digital Entertainment had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of NT$35m and booked a NT$22m accounting loss. Given it only has net cash of NT$11.8m, 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Wayi International Digital Entertainment you should know about.

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. 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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