Tellhow Sci-Tech (SHSE:600590) Is Carrying A Fair Bit Of Debt

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 Tellhow Sci-Tech Co., Ltd. (SHSE:600590) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tellhow Sci-Tech

What Is Tellhow Sci-Tech's Net Debt?

The chart below, which you can click on for greater detail, shows that Tellhow Sci-Tech had CN¥4.41b in debt in June 2024; about the same as the year before. However, it does have CN¥1.51b in cash offsetting this, leading to net debt of about CN¥2.91b.

How Healthy Is Tellhow Sci-Tech's Balance Sheet?

The latest balance sheet data shows that Tellhow Sci-Tech had liabilities of CN¥6.58b due within a year, and liabilities of CN¥2.23b falling due after that. Offsetting this, it had CN¥1.51b in cash and CN¥4.14b in receivables that were due within 12 months. So it has liabilities totalling CN¥3.16b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥5.10b, so it does suggest shareholders should keep an eye on Tellhow Sci-Tech's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tellhow Sci-Tech can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Tellhow Sci-Tech made a loss at the EBIT level, and saw its revenue drop to CN¥4.0b, which is a fall of 38%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Tellhow Sci-Tech's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥464m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥446m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Tellhow Sci-Tech you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.