Is Cool Link (Holdings) (HKG:8491) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Cool Link (Holdings) Limited (HKG:8491) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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?

You can click the graphic below for the historical numbers, but it shows that Cool Link (Holdings) had S$10.0m of debt in June 2022, down from S$16.9m, one year before. However, it also had S$5.03m in cash, and so its net debt is S$4.99m.

How Healthy Is Cool Link (Holdings)'s Balance Sheet?

The latest balance sheet data shows that Cool Link (Holdings) had liabilities of S$10.5m due within a year, and liabilities of S$8.94m falling due after that. Offsetting these obligations, it had cash of S$5.03m as well as receivables valued at S$7.04m due within 12 months. So its liabilities total S$7.42m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of S$8.00m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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.

Over 12 months, Cool Link (Holdings) reported revenue of S$35m, 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.

Caveat Emptor

Despite the top line growth, Cool Link (Holdings) still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping S$2.9m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of S$1.9m. In the meantime, we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Cool Link (Holdings) (3 don't sit too well with us!) that you should be aware of before investing here.

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.

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

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.