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 can see that Talkweb Information System Co.,Ltd. (SZSE:002261) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Talkweb Information SystemLtd

What Is Talkweb Information SystemLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Talkweb Information SystemLtd had debt of CN¥1.21b, up from CN¥337.1m in one year. However, it does have CN¥1.21b in cash offsetting this, leading to net cash of CN¥3.40m.

How Healthy Is Talkweb Information SystemLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Talkweb Information SystemLtd had liabilities of CN¥1.51b due within 12 months and liabilities of CN¥429.7m due beyond that. On the other hand, it had cash of CN¥1.21b and CN¥803.0m worth of receivables due within a year. So it can boast CN¥76.0m more liquid assets than total liabilities.

Having regard to Talkweb Information SystemLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥21.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Talkweb Information SystemLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Talkweb Information SystemLtd will need earnings to service that debt. 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.

In the last year Talkweb Information SystemLtd's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Talkweb Information SystemLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Talkweb Information SystemLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥782m of cash and made a loss of CN¥1.0b. Given it only has net cash of CN¥3.40m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Talkweb Information SystemLtd is showing 1 warning sign in our investment analysis , you should know about...

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.

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.