Does Contel Technology (HKG:1912) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Contel Technology Company Limited (HKG:1912) does carry debt. But the more important question is: how much risk is that debt creating?

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Contel Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Contel Technology had US$15.2m of debt, an increase on US$12.7m, over one year. However, it also had US$2.56m in cash, and so its net debt is US$12.6m.

How Healthy Is Contel Technology's Balance Sheet?

The latest balance sheet data shows that Contel Technology had liabilities of US$32.2m due within a year, and liabilities of US$1.97m falling due after that. Offsetting these obligations, it had cash of US$2.56m as well as receivables valued at US$11.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$20.2m.

The deficiency here weighs heavily on the US$12.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Contel Technology would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Contel Technology'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.

Check out our latest analysis for Contel Technology

In the last year Contel Technology had a loss before interest and tax, and actually shrunk its revenue by 5.9%, to US$62m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Contel Technology produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$4.7m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of US$7.9m. And until that time we think this is a risky stock. 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. For example Contel Technology has 3 warning signs (and 1 which is significant) we think 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.

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.