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. We can see that Super Telecom Co.,Ltd (SHSE:603322) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Super TelecomLtd
What Is Super TelecomLtd's Net Debt?
The image below, which you can click on for greater detail, shows that Super TelecomLtd had debt of CN¥405.2m at the end of September 2023, a reduction from CN¥519.8m over a year. However, it also had CN¥191.7m in cash, and so its net debt is CN¥213.5m.
How Strong Is Super TelecomLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Super TelecomLtd had liabilities of CN¥1.52b due within 12 months and liabilities of CN¥208.2m due beyond that. Offsetting these obligations, it had cash of CN¥191.7m as well as receivables valued at CN¥805.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥730.5m.
Given Super TelecomLtd has a market capitalization of CN¥6.04b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Super TelecomLtd'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.
Over 12 months, Super TelecomLtd reported revenue of CN¥2.2b, which is a gain of 33%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
While we can certainly appreciate Super TelecomLtd's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥126m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥95m into a profit. So to be blunt we do think it is risky. 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. Case in point: We've spotted 1 warning sign for Super TelecomLtd you should be aware of.
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.