Is CloudWalk Technology (SHSE:688327) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 CloudWalk Technology Co., Ltd. (SHSE:688327) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CloudWalk Technology

What Is CloudWalk Technology's Net Debt?

As you can see below, CloudWalk Technology had CN¥366.5m of debt at September 2024, down from CN¥648.8m a year prior. However, its balance sheet shows it holds CN¥902.4m in cash, so it actually has CN¥535.9m net cash.

A Look At CloudWalk Technology's Liabilities

According to the last reported balance sheet, CloudWalk Technology had liabilities of CN¥808.6m due within 12 months, and liabilities of CN¥241.4m due beyond 12 months. On the other hand, it had cash of CN¥902.4m and CN¥661.2m worth of receivables due within a year. So it actually has CN¥513.7m more liquid assets than total liabilities.

This surplus suggests that CloudWalk Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that CloudWalk Technology 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 you can't view debt in total isolation; since CloudWalk Technology will need earnings to service that debt. 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, CloudWalk Technology reported revenue of CN¥509m, which is a gain of 22%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is CloudWalk Technology?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that CloudWalk Technology had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥368m and booked a CN¥748m accounting loss. But at least it has CN¥535.9m on the balance sheet to spend on growth, near-term. CloudWalk Technology's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. We've identified 1 warning sign with CloudWalk Technology , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.