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

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Linktel Technologies Co., Ltd. (SZSE:301205) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Linktel Technologies

How Much Debt Does Linktel Technologies Carry?

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. But it also has CN¥509.6m in cash to offset that, meaning it has CN¥238.4m net cash.

How Healthy Is Linktel Technologies' Balance Sheet?

The latest balance sheet data shows that Linktel Technologies had liabilities of CN¥604.4m due within a year, and liabilities of CN¥10.7m falling due after 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 actually has 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¥10.2b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Linktel Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Linktel Technologies grew its EBIT by 178% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Linktel Technologies 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Linktel Technologies 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 three years, Linktel Technologies 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 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Linktel Technologies (of which 2 are potentially serious!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.