Yahoo Finance iCandy Interactive (ASX:ICI) Has Debt But No Earnings; Should You Worry?
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. 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. We can see that iCandy Interactive Limited (ASX:ICI) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for iCandy Interactive
What Is iCandy Interactive's Net Debt?
As you can see below, iCandy Interactive had AU$792.7k of debt at June 2019, down from AU$851.7k a year prior. However, its balance sheet shows it holds AU$983.0k in cash, so it actually has AU$190.2k net cash.
How Strong Is iCandy Interactive's Balance Sheet?
The latest balance sheet data shows that iCandy Interactive had liabilities of AU$1.53m due within a year, and liabilities of AU$8.9k falling due after that. Offsetting these obligations, it had cash of AU$983.0k as well as receivables valued at AU$812.0k due within 12 months. So it actually has AU$259.5k more liquid assets than total liabilities.
This short term liquidity is a sign that iCandy Interactive could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that iCandy Interactive has more cash than debt is arguably a good indication that it can manage its debt safely. 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 iCandy Interactive will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year iCandy Interactive wasn't profitable at an EBIT level, but managed to grow its revenue by23%, to AU$2.9m. With any luck the company will be able to grow its way to profitability.
So How Risky Is iCandy Interactive?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months iCandy Interactive lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$1.2m of cash and made a loss of AU$3.2m. With only AU$190.2k on the balance sheet, it would appear that its going to need to raise capital again soon. iCandy Interactive's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. For riskier companies like iCandy Interactive I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
