Does Comba Telecom Systems Holdings (HKG:2342) 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Comba Telecom Systems Holdings Limited (HKG:2342) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Comba Telecom Systems Holdings

How Much Debt Does Comba Telecom Systems Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Comba Telecom Systems Holdings had HK$1.79b of debt, an increase on HK$1.49b, over one year. But on the other hand it also has HK$1.90b in cash, leading to a HK$113.0m net cash position.

How Healthy Is Comba Telecom Systems Holdings' Balance Sheet?

We can see from the most recent balance sheet that Comba Telecom Systems Holdings had liabilities of HK$5.96b falling due within a year, and liabilities of HK$1.37b due beyond that. On the other hand, it had cash of HK$1.90b and HK$4.23b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$1.20b.

While this might seem like a lot, it is not so bad since Comba Telecom Systems Holdings has a market capitalization of HK$3.84b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Comba Telecom Systems Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Comba Telecom Systems Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Comba Telecom Systems Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to HK$5.9b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Comba Telecom Systems Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Comba Telecom Systems Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$224m and booked a HK$593m accounting loss. Given it only has net cash of HK$113.0m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Comba Telecom Systems Holdings is showing 1 warning sign in our investment analysis , you should know about...

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.