Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Linktel Technologies Co., Ltd. (SZSE:301205) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Linktel Technologies
What Is Linktel Technologies's Debt?
The image below, which you can click on for greater detail, shows that Linktel Technologies had debt of CN¥119.1m at the end of September 2023, a reduction from CN¥128.1m over a year. But it also has CN¥650.7m in cash to offset that, meaning it has CN¥531.6m net cash.
How Healthy Is Linktel Technologies' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Linktel Technologies had liabilities of CN¥228.4m due within 12 months and liabilities of CN¥8.47m due beyond that. On the other hand, it had cash of CN¥650.7m and CN¥144.0m worth of receivables due within a year. So it can boast CN¥557.8m more liquid assets than total liabilities.
This surplus suggests that Linktel Technologies has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Linktel Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.
The modesty of its debt load may become crucial for Linktel Technologies if management cannot prevent a repeat of the 87% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Linktel Technologies's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Linktel Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Linktel Technologies burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Linktel Technologies has net cash of CN¥531.6m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Linktel Technologies's balance sheet. 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 3 warning signs we've spotted with Linktel Technologies (including 1 which makes us a bit uncomfortable) .
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.