Here's Why Talkweb Information SystemLtd (SZSE:002261) Has A Meaningful Debt Burden

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.' 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. Importantly, Talkweb Information System Co.,Ltd. (SZSE:002261) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Talkweb Information SystemLtd

What Is Talkweb Information SystemLtd's Net Debt?

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. However, it does have CN¥1.61b in cash offsetting this, leading to net cash of CN¥96.6m.

How Strong Is Talkweb Information SystemLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Talkweb Information SystemLtd had liabilities of CN¥2.13b due within 12 months 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 actually has CN¥395.3m 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¥21.1b 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.

We also note that Talkweb Information SystemLtd improved its EBIT from a last year's loss to a positive CN¥47m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Talkweb Information SystemLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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. During the last year, Talkweb Information SystemLtd burned a lot of cash. 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 Talkweb Information SystemLtd has net cash of CN¥96.6m, as well as more liquid assets than liabilities. So while Talkweb Information SystemLtd does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Talkweb Information SystemLtd has 2 warning signs (and 1 which can't be ignored) we think 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.