Does Cool Link (Holdings) (HKG:8491) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Cool Link (Holdings) Limited (HKG:8491) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Cool Link (Holdings)

What Is Cool Link (Holdings)'s Net Debt?

As you can see below, Cool Link (Holdings) had S$5.23m of debt at June 2024, down from S$7.10m a year prior. However, it does have S$13.0m in cash offsetting this, leading to net cash of S$7.80m.

A Look At Cool Link (Holdings)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Cool Link (Holdings) had liabilities of S$6.50m due within 12 months and liabilities of S$7.03m due beyond that. On the other hand, it had cash of S$13.0m and S$7.61m worth of receivables due within a year. So it can boast S$7.12m more liquid assets than total liabilities.

This surplus strongly suggests that Cool Link (Holdings) has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Cool Link (Holdings) has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Cool Link (Holdings)'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.

In the last year Cool Link (Holdings) had a loss before interest and tax, and actually shrunk its revenue by 9.9%, to S$30m. We would much prefer see growth.

So How Risky Is Cool Link (Holdings)?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Cool Link (Holdings) had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through S$4.3m of cash and made a loss of S$2.5m. But the saving grace is the S$7.80m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 4 warning signs for Cool Link (Holdings) (of which 2 are concerning!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.