Health Check: How Prudently Does Cayenne Entertainment Technology (GTSM:4946) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Cayenne Entertainment Technology Co., Ltd. (GTSM:4946) 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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Cayenne Entertainment Technology

What Is Cayenne Entertainment Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Cayenne Entertainment Technology had NT$50.0m of debt, an increase on NT$32.0m, over one year. However, its balance sheet shows it holds NT$63.7m in cash, so it actually has NT$13.7m net cash.

How Healthy Is Cayenne Entertainment Technology's Balance Sheet?

The latest balance sheet data shows that Cayenne Entertainment Technology had liabilities of NT$124.3m due within a year, and liabilities of NT$2.17m falling due after that. Offsetting this, it had NT$63.7m in cash and NT$15.1m in receivables that were due within 12 months. So its liabilities total NT$47.7m more than the combination of its cash and short-term receivables.

Given Cayenne Entertainment Technology has a market capitalization of NT$422.8m, 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. While it does have liabilities worth noting, Cayenne Entertainment Technology 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 Cayenne Entertainment Technology'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 Cayenne Entertainment Technology had a loss before interest and tax, and actually shrunk its revenue by 14%, to NT$254m. That's not what we would hope to see.

So How Risky Is Cayenne Entertainment Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Cayenne Entertainment Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through NT$162m of cash and made a loss of NT$163m. With only NT$13.7m 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Cayenne Entertainment Technology (of which 1 doesn't sit too well with us!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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