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

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.' 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 the real question is whether this debt is making the company risky.

We check all companies for important risks. See what we found for Tencent Music Entertainment Group in our free report.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Tencent Music Entertainment Group's Net Debt?

The chart below, which you can click on for greater detail, shows that Tencent Music Entertainment Group had CN¥5.73b in debt in December 2024; about the same as the year before. But it also has CN¥27.2b in cash to offset that, meaning it has CN¥21.5b net cash.

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

Zooming in on the latest balance sheet data, we can see that Tencent Music Entertainment Group had liabilities of CN¥16.6b due within 12 months and liabilities of CN¥4.17b due beyond that. On the other hand, it had cash of CN¥27.2b and CN¥4.61b worth of receivables due within a year. So it actually has CN¥11.1b more liquid assets than total liabilities.

This short term liquidity is a sign that Tencent Music Entertainment Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Tencent Music Entertainment Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Tencent Music Entertainment Group

In addition to that, we're happy to report that Tencent Music Entertainment Group has boosted its EBIT by 51%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 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¥21.5b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 136% of that EBIT to free cash flow, bringing in CN¥9.2b. So we don't think Tencent Music Entertainment Group's use of debt is risky. 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.