Warren Buffett famously said, '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, Comba Telecom Systems Holdings Limited (HKG:2342) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Comba Telecom Systems Holdings
What Is Comba Telecom Systems Holdings's Net Debt?
As you can see below, Comba Telecom Systems Holdings had HK$1.62b of debt at December 2022, down from HK$1.79b a year prior. However, its balance sheet shows it holds HK$1.81b in cash, so it actually has HK$189.6m net cash.
How Healthy Is Comba Telecom Systems Holdings' Balance Sheet?
According to the last reported balance sheet, Comba Telecom Systems Holdings had liabilities of HK$5.52b due within 12 months, and liabilities of HK$1.09b due beyond 12 months. On the other hand, it had cash of HK$1.81b and HK$4.03b worth of receivables due within a year. So it has liabilities totalling HK$771.9m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Comba Telecom Systems Holdings is worth HK$3.64b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Comba Telecom Systems Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.
It was also good to see that despite losing money on the EBIT line last year, Comba Telecom Systems Holdings turned things around in the last 12 months, delivering and EBIT of HK$119m. 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 Comba Telecom Systems Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Comba Telecom Systems Holdings 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. Over the last year, Comba Telecom Systems Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While Comba Telecom Systems Holdings does have more liabilities than liquid assets, it also has net cash of HK$189.6m. And it impressed us with free cash flow of HK$199m, being 167% of its EBIT. So we don't have any problem with Comba Telecom Systems Holdings's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Comba Telecom Systems Holdings , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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.
コンバ・テレコム・システムズ・ホールディングスは36億4,000万香港ドルの価値があり、必要があれば貸借対照表を強化するのに十分な資本を調達することができるので、この赤字はそれほどひどくはありません。しかし、希薄化せずに負債を管理できるかどうかを綿密に検討する必要があることは明らかです。注目すべき負債はありますが、Comba Telecom Systems Holdingsは負債よりも現金の方が多いので、負債を安全に管理できると確信しています。
最後に、税務担当者は会計上の利益が大好きかもしれませんが、貸し手は冷たい現金しか受け取りません。Comba Telecom Systems Holdingsは貸借対照表に純現金があるかもしれませんが、それでもその企業が利息および税引前収益(EBIT)をフリーキャッシュフローにどれだけうまく変換しているかを見るのは興味深いことです。なぜなら、それは企業の債務の必要性と管理能力の両方に影響するからです。コンバ・テレコム・システムズ・ホールディングスは昨年、実際にはEBITよりも多くのフリーキャッシュフローを生み出しました。そのような強力な現金創出は、マルハナバチのスーツを着た子犬のように私たちの心を温めます。