Is TeleChoice International (SGX:T41) Using Debt In A Risky Way?

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. We can see that TeleChoice International Limited (SGX:T41) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 TeleChoice International

What Is TeleChoice International's Debt?

The image below, which you can click on for greater detail, shows that TeleChoice International had debt of S$2.50m at the end of December 2021, a reduction from S$14.1m over a year. However, its balance sheet shows it holds S$34.8m in cash, so it actually has S$32.3m net cash.

A Look At TeleChoice International's Liabilities

The latest balance sheet data shows that TeleChoice International had liabilities of S$55.2m due within a year, and liabilities of S$3.96m falling due after that. Offsetting this, it had S$34.8m in cash and S$52.6m in receivables that were due within 12 months. So it actually has S$28.3m more liquid assets than total liabilities.

This surplus strongly suggests that TeleChoice International has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that TeleChoice International has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is TeleChoice International'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, TeleChoice International made a loss at the EBIT level, and saw its revenue drop to S$194m, which is a fall of 9.0%. That's not what we would hope to see.

So How Risky Is TeleChoice International?

While TeleChoice International lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow S$26m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for TeleChoice International (of which 1 doesn't sit too well with us!) 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.

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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.