Does Tencent Music Entertainment Group (NYSE:TME) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Tencent Music Entertainment Group (NYSE:TME) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Tencent Music Entertainment Group

What Is Tencent Music Entertainment Group's Debt?

As you can see below, Tencent Music Entertainment Group had CN¥5.71b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥22.2b in cash to offset that, meaning it has CN¥16.5b net cash.

How Healthy Is Tencent Music Entertainment Group's Balance Sheet?

We can see from the most recent balance sheet that Tencent Music Entertainment Group had liabilities of CN¥11.4b falling due within a year, and liabilities of CN¥6.38b due beyond that. Offsetting these obligations, it had cash of CN¥22.2b as well as receivables valued at CN¥2.50b due within 12 months. So it actually has CN¥6.94b more liquid assets than total liabilities.

This surplus suggests that Tencent Music Entertainment Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Tencent Music Entertainment Group has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Tencent Music Entertainment Group has boosted its EBIT by 52%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Tencent Music Entertainment Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Tencent Music Entertainment Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Tencent Music Entertainment Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tencent Music Entertainment Group has CN¥16.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥6.8b, being 138% of its EBIT. So is Tencent Music Entertainment Group's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Tencent Music Entertainment Group, you may well want to click here to check an interactive graph of its earnings per share history.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.