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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.' 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, International Entertainment Corporation (HKG:1009) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for International Entertainment
What Is International Entertainment's Net Debt?
As you can see below, at the end of March 2019, International Entertainment had HK$416.3m of debt, up from HK$339.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$505.7m in cash, so it actually has HK$89.4m net cash.
How Strong Is International Entertainment's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that International Entertainment had liabilities of HK$144.9m due within 12 months and liabilities of HK$606.2m due beyond that. On the other hand, it had cash of HK$505.7m and HK$88.2m worth of receivables due within a year. So it has liabilities totalling HK$157.3m more than its cash and near-term receivables, combined.
Of course, International Entertainment has a market capitalization of HK$944.7m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, International Entertainment boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since International Entertainment will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.