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.' 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. As with many other companies Comba Telecom Systems Holdings Limited (HKG:2342) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Comba Telecom Systems Holdings's Debt?
As you can see below, Comba Telecom Systems Holdings had HK$892.2m of debt at June 2024, down from HK$1.23b a year prior. But on the other hand it also has HK$1.66b in cash, leading to a HK$772.7m net cash position.
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A Look At Comba Telecom Systems Holdings' Liabilities
Zooming in on the latest balance sheet data, we can see that Comba Telecom Systems Holdings had liabilities of HK$4.73b due within 12 months and liabilities of HK$515.4m due beyond that. On the other hand, it had cash of HK$1.66b and HK$3.28b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$305.0m.
Since publicly traded Comba Telecom Systems Holdings shares are worth a total of HK$2.91b, 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. Despite its noteworthy liabilities, Comba Telecom Systems Holdings 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 it is Comba Telecom Systems Holdings'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.
In the last year Comba Telecom Systems Holdings had a loss before interest and tax, and actually shrunk its revenue by 22%, to HK$5.1b. To be frank that doesn't bode well.
So How Risky Is Comba Telecom Systems Holdings?
While Comba Telecom Systems Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$277m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. Case in point: We've spotted 2 warning signs for Comba Telecom Systems Holdings you should be aware of, and 1 of them is a bit unpleasant.
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.