Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Super Telecom Co.,Ltd (SHSE:603322) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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.
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. On the flip side, it has CN¥191.7m in cash leading to net debt of about CN¥213.5m.
How Healthy 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 total CN¥730.5m more than the combination of its cash and short-term receivables.
Since publicly traded Super TelecomLtd shares are worth a total of CN¥5.16b, 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Super TelecomLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
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
Despite the top line growth, Super TelecomLtd still had an earnings before interest and tax (EBIT) loss over the last year. 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥95m into a profit. So we do think this stock is quite risky. 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. For example - Super TelecomLtd has 1 warning sign we think 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.