Comba Telecom Systems Holdings (HKG:2342) Is Carrying A Fair Bit Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Comba Telecom Systems Holdings Limited (HKG:2342) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

View our latest analysis for Comba Telecom Systems Holdings

What Is Comba Telecom Systems Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Comba Telecom Systems Holdings had debt of HK$1.94b, up from HK$1.67b in one year. However, because it has a cash reserve of HK$1.82b, its net debt is less, at about HK$119.1m.

How Strong Is Comba Telecom Systems Holdings' Balance Sheet?

The latest balance sheet data shows that Comba Telecom Systems Holdings had liabilities of HK$5.98b due within a year, and liabilities of HK$1.29b falling due after that. On the other hand, it had cash of HK$1.82b and HK$4.30b worth of receivables due within a year. So it has liabilities totalling HK$1.15b more than its cash and near-term receivables, combined.

Comba Telecom Systems Holdings has a market capitalization of HK$3.76b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Comba Telecom Systems Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Comba Telecom Systems Holdings reported revenue of HK$6.5b, which is a gain of 24%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Comba Telecom Systems Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable HK$638m 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. For example, we would not want to see a repeat of last year's loss of HK$413m. So we do think this stock is quite risky. For riskier companies like Comba Telecom Systems Holdings I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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. 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.