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

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.' 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. As with many other companies Tencent Music Entertainment Group (NYSE:TME) makes use of 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. 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 Tencent Music Entertainment Group

How Much Debt Does Tencent Music Entertainment Group Carry?

You can click the graphic below for the historical numbers, but it shows that Tencent Music Entertainment Group had CN¥3.48b of debt in September 2024, down from CN¥5.71b, one year before. But it also has CN¥28.6b in cash to offset that, meaning it has CN¥25.1b 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¥15.3b falling due within a year, and liabilities of CN¥4.11b due beyond that. On the other hand, it had cash of CN¥28.6b and CN¥2.94b worth of receivables due within a year. So it actually has CN¥12.1b 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 50%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tencent Music Entertainment Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Happily for any shareholders, Tencent Music Entertainment Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tencent Music Entertainment Group has CN¥25.1b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥8.6b, being 128% 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.

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

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.