Here's Why Linktel Technologies (SZSE:301205) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Linktel Technologies Co., Ltd. (SZSE:301205) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Linktel Technologies's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Linktel Technologies had debt of CN¥271.2m, up from CN¥119.1m in one year. However, it does have CN¥509.6m in cash offsetting this, leading to net cash of CN¥238.4m.

How Healthy Is Linktel Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Linktel Technologies had liabilities of CN¥604.4m due within 12 months and liabilities of CN¥10.7m due beyond that. Offsetting these obligations, it had cash of CN¥509.6m as well as receivables valued at CN¥206.7m due within 12 months. So it can boast CN¥101.3m more liquid assets than total liabilities.

Having regard to Linktel Technologies' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥8.73b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Linktel Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Linktel Technologies

Better yet, Linktel Technologies grew its EBIT by 178% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Linktel Technologies's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Linktel Technologies may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Linktel Technologies burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Linktel Technologies has net cash of CN¥238.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 178% year-on-year EBIT growth. So we are not troubled with Linktel Technologies's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Linktel Technologies (including 2 which are potentially serious) .

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.