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.' 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. We can see that Tian Ge Interactive Holdings Limited (HKG:1980) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tian Ge Interactive Holdings

How Much Debt Does Tian Ge Interactive Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Tian Ge Interactive Holdings had CN¥436.6m of debt, an increase on CN¥397.6m, over one year. However, its balance sheet shows it holds CN¥1.50b in cash, so it actually has CN¥1.06b net cash.

How Strong Is Tian Ge Interactive Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tian Ge Interactive Holdings had liabilities of CN¥603.7m due within 12 months and liabilities of CN¥31.0m due beyond that. Offsetting these obligations, it had cash of CN¥1.50b as well as receivables valued at CN¥10.3m due within 12 months. So it can boast CN¥871.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that Tian Ge Interactive Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Tian Ge Interactive Holdings 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 Tian Ge Interactive Holdings 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 Tian Ge Interactive Holdings had a loss before interest and tax, and actually shrunk its revenue by 31%, to CN¥179m. To be frank that doesn't bode well.

So How Risky Is Tian Ge Interactive Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Tian Ge Interactive Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥81m and booked a CN¥356m accounting loss. With only CN¥1.06b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Tian Ge Interactive Holdings (including 2 which can't be ignored) .

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.

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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.