Is CloudWalk Technology (SHSE:688327) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, CloudWalk Technology Co., Ltd. (SHSE:688327) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for CloudWalk Technology

How Much Debt Does CloudWalk Technology Carry?

The image below, which you can click on for greater detail, shows that CloudWalk Technology had debt of CN¥606.3m at the end of March 2024, a reduction from CN¥973.8m over a year. However, its balance sheet shows it holds CN¥1.31b in cash, so it actually has CN¥701.7m net cash.

How Healthy Is CloudWalk Technology's Balance Sheet?

The latest balance sheet data shows that CloudWalk Technology had liabilities of CN¥1.07b due within a year, and liabilities of CN¥246.3m falling due after that. Offsetting this, it had CN¥1.31b in cash and CN¥679.9m in receivables that were due within 12 months. So it can boast CN¥672.1m more liquid assets than total liabilities.

This short term liquidity is a sign that CloudWalk Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, CloudWalk Technology boasts net cash, so it's fair to say it does not have a heavy debt load! 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year CloudWalk Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 78%, to CN¥637m. With any luck the company will be able to grow its way to profitability.

So How Risky Is CloudWalk Technology?

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 CloudWalk Technology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥476m and booked a CN¥660m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥701.7m. That means it could keep spending at its current rate for more than two years. 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. For riskier companies like CloudWalk Technology 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.

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.

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