Is Cheer Time Enterprise (TPE:3229) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Cheer Time Enterprise Co., Ltd (TPE:3229) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

Check out our latest analysis for Cheer Time Enterprise

What Is Cheer Time Enterprise's Debt?

As you can see below, at the end of December 2020, Cheer Time Enterprise had NT$157.0m of debt, up from NT$148.9m a year ago. Click the image for more detail. However, it also had NT$112.3m in cash, and so its net debt is NT$44.7m.

How Strong Is Cheer Time Enterprise's Balance Sheet?

We can see from the most recent balance sheet that Cheer Time Enterprise had liabilities of NT$190.8m falling due within a year, and liabilities of NT$103.7m due beyond that. Offsetting this, it had NT$112.3m in cash and NT$108.9m in receivables that were due within 12 months. So its liabilities total NT$73.3m more than the combination of its cash and short-term receivables.

Given Cheer Time Enterprise has a market capitalization of NT$600.4m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Cheer Time Enterprise'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.

Over 12 months, Cheer Time Enterprise made a loss at the EBIT level, and saw its revenue drop to NT$391m, which is a fall of 31%. To be frank that doesn't bode well.

Caveat Emptor

While Cheer Time Enterprise's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable NT$172m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$96m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example Cheer Time Enterprise has 2 warning signs (and 1 which is significant) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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