David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Linktel Technologies's Debt?

As you can see below, at the end of March 2024, Linktel Technologies had CN¥179.1m of debt, up from CN¥89.1m a year ago. Click the image for more detail. However, it does have CN¥458.0m in cash offsetting this, leading to net cash of CN¥278.9m.

How Strong Is Linktel Technologies' Balance Sheet?

The latest balance sheet data shows that Linktel Technologies had liabilities of CN¥316.6m due within a year, and liabilities of CN¥9.30m falling due after that. Offsetting these obligations, it had cash of CN¥458.0m as well as receivables valued at CN¥169.9m due within 12 months. So it actually has CN¥302.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Linktel Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Linktel Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Linktel Technologies will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Linktel Technologies made a loss at the EBIT level, and saw its revenue drop to CN¥606m, which is a fall of 27%. To be frank that doesn't bode well.

So How Risky Is Linktel Technologies?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Linktel Technologies lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥364m of cash and made a loss of CN¥4.7m. With only CN¥278.9m on the balance sheet, it would appear that its going to need to raise capital again 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Linktel Technologies .

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.

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