Would Cool Link (Holdings) (HKG:8491) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. 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?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Cool Link (Holdings)

How Much Debt Does Cool Link (Holdings) Carry?

As you can see below, Cool Link (Holdings) had S$11.3m of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have S$6.80m in cash offsetting this, leading to net debt of about S$4.47m.

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

According to the last reported balance sheet, Cool Link (Holdings) had liabilities of S$5.07m due within 12 months, and liabilities of S$13.8m due beyond 12 months. On the other hand, it had cash of S$6.80m and S$5.00m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$7.05m.

Of course, Cool Link (Holdings) has a market capitalization of S$50.0m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Cool Link (Holdings)'s earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Cool Link (Holdings) reported revenue of S$27m, which is a gain of 15%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Cool Link (Holdings) had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost S$680k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of S$700k into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Cool Link (Holdings) is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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. 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.
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