Is Talkweb Information SystemLtd (SZSE:002261) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Talkweb Information System Co.,Ltd. (SZSE:002261) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Talkweb Information SystemLtd

What Is Talkweb Information SystemLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Talkweb Information SystemLtd had debt of CN¥1.21b, up from CN¥337.1m in one year. But on the other hand it also has CN¥1.21b in cash, leading to a CN¥3.40m net cash position.

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¥1.51b falling due within a year, and liabilities of CN¥429.7m due beyond that. On the other hand, it had cash of CN¥1.21b and CN¥803.0m worth of receivables due within a year. So it can boast CN¥76.0m 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¥17.8b 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. 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.

Over 12 months, Talkweb Information SystemLtd saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Talkweb Information SystemLtd?

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 Talkweb Information SystemLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥782m and booked a CN¥1.0b accounting loss. Given it only has net cash of CN¥3.40m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Talkweb Information SystemLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

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.