The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Datang Telecom Technology Co., Ltd. (SHSE:600198) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Datang Telecom Technology
How Much Debt Does Datang Telecom Technology Carry?
The image below, which you can click on for greater detail, shows that Datang Telecom Technology had debt of CN¥158.7m at the end of September 2023, a reduction from CN¥272.8m over a year. But it also has CN¥396.1m in cash to offset that, meaning it has CN¥237.4m net cash.
How Strong Is Datang Telecom Technology's Balance Sheet?
The latest balance sheet data shows that Datang Telecom Technology had liabilities of CN¥1.50b due within a year, and liabilities of CN¥184.6m falling due after that. On the other hand, it had cash of CN¥396.1m and CN¥902.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥386.5m.
Since publicly traded Datang Telecom Technology shares are worth a total of CN¥9.38b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Datang Telecom Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Datang Telecom Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Datang Telecom Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.0b, which is a fall of 13%. That's not what we would hope to see.
So How Risky Is Datang Telecom Technology?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Datang Telecom Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥123m of cash and made a loss of CN¥27m. With only CN¥237.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Datang Telecom Technology's profit, revenue, and operating cashflow have changed over the last few years.
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.
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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.