We Think Cheer Time Enterprise Co (TPE:3229) Has A Fair Chunk Of Debt

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, Cheer Time Enterprise Co Ltd. (TPE:3229) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 Cheer Time Enterprise Co

How Much Debt Does Cheer Time Enterprise Co Carry?

The image below, which you can click on for greater detail, shows that Cheer Time Enterprise Co had debt of NT$155.7m at the end of September 2020, a reduction from NT$191.0m over a year. However, it also had NT$108.4m in cash, and so its net debt is NT$47.3m.

How Healthy Is Cheer Time Enterprise Co's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cheer Time Enterprise Co had liabilities of NT$170.5m due within 12 months and liabilities of NT$107.9m due beyond that. On the other hand, it had cash of NT$108.4m and NT$123.4m worth of receivables due within a year. So its liabilities total NT$46.6m more than the combination of its cash and short-term receivables.

Given Cheer Time Enterprise Co has a market capitalization of NT$509.7m, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Cheer Time Enterprise Co'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.

Over 12 months, Cheer Time Enterprise Co made a loss at the EBIT level, and saw its revenue drop to NT$462m, which is a fall of 10%. We would much prefer see growth.

Caveat Emptor

While Cheer Time Enterprise Co's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping NT$167m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled NT$119m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Case in point: We've spotted 4 warning signs for Cheer Time Enterprise Co you should be aware of, and 1 of them is a bit unpleasant.

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.

When trading Cheer Time Enterprise Co or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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