Is TeleChoice International (SGX:T41) A Risky Investment?

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 TeleChoice International Limited (SGX:T41) makes use of debt. But is this debt a concern to shareholders?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is TeleChoice International's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 TeleChoice International had debt of S$38.3m, up from S$16.1m in one year. But it also has S$38.6m in cash to offset that, meaning it has S$328.0k net cash.

How Strong Is TeleChoice International's Balance Sheet?

The latest balance sheet data shows that TeleChoice International had liabilities of S$155.3m due within a year, and liabilities of S$9.29m falling due after that. Offsetting these obligations, it had cash of S$38.6m as well as receivables valued at S$109.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$16.9m.

This deficit isn't so bad because TeleChoice International is worth S$49.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, TeleChoice International also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for TeleChoice International

Notably, TeleChoice International made a loss at the EBIT level, last year, but improved that to positive EBIT of S$6.6m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since TeleChoice International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. TeleChoice International may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, TeleChoice International saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While TeleChoice International does have more liabilities than liquid assets, it also has net cash of S$328.0k. So while TeleChoice International does not have a great balance sheet, it's certainly not too bad. 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. Be aware that TeleChoice International is showing 4 warning signs in our investment analysis , and 2 of those are potentially serious...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.