Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Talkweb Information System Co.,Ltd. (SZSE:002261) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Talkweb Information SystemLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Talkweb Information SystemLtd had CN¥1.21b of debt, an increase on CN¥337.1m, over one year. But it also has CN¥1.21b in cash to offset that, meaning it has CN¥3.40m net cash.

How Healthy Is Talkweb Information SystemLtd's Balance Sheet?

We can see from the most recent balance sheet that Talkweb Information SystemLtd had liabilities of CN¥1.51b falling due within a year, and liabilities of CN¥429.7m due beyond that. Offsetting this, it had CN¥1.21b in cash and CN¥803.0m in receivables that were due within 12 months. So it actually has 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¥21.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Talkweb Information SystemLtd 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 Talkweb Information SystemLtd 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.

In the last year Talkweb Information SystemLtd's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Talkweb Information SystemLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Talkweb Information SystemLtd lost money at the earnings before interest and tax (EBIT) line. 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. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like Talkweb Information SystemLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.