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 Talkweb Information System Co.,Ltd. (SZSE:002261) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Talkweb Information SystemLtd Carry?

As you can see below, at the end of September 2024, Talkweb Information SystemLtd had CN¥1.51b of debt, up from CN¥1.21b a year ago. Click the image for more detail. But it also has CN¥1.61b in cash to offset that, meaning it has CN¥96.6m 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¥2.13b falling due within a year, and liabilities of CN¥756.4m due beyond that. On the other hand, it had cash of CN¥1.61b and CN¥1.68b worth of receivables due within a year. So it can boast CN¥395.3m more liquid assets than total liabilities.

This state of affairs indicates that Talkweb Information SystemLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥31.2b 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!

We also note that Talkweb Information SystemLtd improved its EBIT from a last year's loss to a positive CN¥47m. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Talkweb Information SystemLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Talkweb Information SystemLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Talkweb Information SystemLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Talkweb Information SystemLtd has CN¥96.6m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Talkweb Information SystemLtd's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Talkweb Information SystemLtd that you should be aware of before investing here.

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.