Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Linktel Technologies Co., Ltd. (SZSE:301205) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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 Linktel Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Linktel Technologies had CN¥271.2m of debt, an increase on CN¥119.1m, over one year. But it also has CN¥509.6m in cash to offset that, meaning it has CN¥238.4m net cash.

A Look At Linktel Technologies' Liabilities

The latest balance sheet data shows that Linktel Technologies had liabilities of CN¥604.4m due within a year, and liabilities of CN¥10.7m falling due after that. Offsetting this, it had CN¥509.6m in cash and CN¥206.7m in receivables that were due within 12 months. So it can boast CN¥101.3m more liquid assets than total liabilities.

This state of affairs indicates that Linktel Technologies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥9.14b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Linktel Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Linktel Technologies grew its EBIT by 178% over twelve months. That boost will make it even easier to pay down debt going forward. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Linktel Technologies 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 three years, Linktel Technologies 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 we empathize with investors who find debt concerning, you should keep in mind that Linktel Technologies has net cash of CN¥238.4m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 178% over the last year. So we are not troubled with Linktel Technologies's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Linktel Technologies (including 2 which don't sit too well with us) .

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.