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. As with many other companies Linekong Interactive Group Co., Ltd. (HKG:8267) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Linekong Interactive Group

How Much Debt Does Linekong Interactive Group Carry?

As you can see below, Linekong Interactive Group had CN¥204.5m of debt, at December 2019, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥237.4m in cash to offset that, meaning it has CN¥32.9m net cash.

A Look At Linekong Interactive Group's Liabilities

According to the last reported balance sheet, Linekong Interactive Group had liabilities of CN¥311.7m due within 12 months, and liabilities of CN¥3.09m due beyond 12 months. Offsetting this, it had CN¥237.4m in cash and CN¥49.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥28.2m.

Given Linekong Interactive Group has a market capitalization of CN¥163.7m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Linekong Interactive Group also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Linekong Interactive Group 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.

In the last year Linekong Interactive Group had negative earnings before interest and tax, and actually shrunk its revenue by 51%, to CN¥226m. To be frank that doesn't bode well.

So How Risky Is Linekong Interactive Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Linekong Interactive Group had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of CN¥48m and booked a CN¥109m accounting loss. But the saving grace is the CN¥32.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Linekong Interactive Group you should be aware of, and 1 of them is concerning.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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