Is TeleChoice International (SGX:T41) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that TeleChoice International Limited (SGX:T41) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for TeleChoice International

What Is TeleChoice International's Debt?

You can click the graphic below for the historical numbers, but it shows that TeleChoice International had S$5.88m of debt in June 2022, down from S$9.67m, one year before. However, its balance sheet shows it holds S$21.4m in cash, so it actually has S$15.5m net cash.

How Strong Is TeleChoice International's Balance Sheet?

The latest balance sheet data shows that TeleChoice International had liabilities of S$58.7m due within a year, and liabilities of S$2.73m falling due after that. On the other hand, it had cash of S$21.4m and S$55.1m worth of receivables due within a year. So it actually has S$15.1m more liquid assets than total liabilities.

This luscious liquidity implies that TeleChoice International's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that TeleChoice International has more cash than debt is arguably a good indication that it can manage its debt safely. 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.

Over 12 months, TeleChoice International made a loss at the EBIT level, and saw its revenue drop to S$200m, which is a fall of 3.2%. 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$2.2m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example TeleChoice International has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.