Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Comba Telecom Systems Holdings Limited (HKG:2342) makes use of debt. 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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Comba Telecom Systems Holdings Carry?

As you can see below, Comba Telecom Systems Holdings had HK$1.14b 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$529.5m net cash position.

How Healthy Is Comba Telecom Systems Holdings' Balance Sheet?

We can see from the most recent balance sheet that Comba Telecom Systems Holdings had liabilities of HK$4.73b falling due within a year, and liabilities of HK$515.4m due beyond that. Offsetting this, it had HK$1.66b in cash and HK$3.28b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$305.0m.

Given Comba Telecom Systems Holdings has a market capitalization of HK$3.02b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Comba Telecom Systems Holdings also has more cash than debt, so we're pretty confident 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 Comba Telecom Systems Holdings 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, Comba Telecom Systems Holdings made a loss at the EBIT level, and saw its revenue drop to HK$5.1b, which is a fall of 22%. To be frank that doesn't bode well.

So How Risky Is Comba Telecom Systems Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Comba Telecom Systems Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$32m of cash and made a loss of HK$264m. With only HK$529.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Be aware that Comba Telecom Systems Holdings is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.