Is Cameo Communications (TWSE:6142) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that Cameo Communications, Inc. (TWSE:6142) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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, 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 Cameo Communications

How Much Debt Does Cameo Communications Carry?

The image below, which you can click on for greater detail, shows that Cameo Communications had debt of NT$559.4m at the end of September 2024, a reduction from NT$681.6m over a year. However, its balance sheet shows it holds NT$612.1m in cash, so it actually has NT$52.7m net cash.

How Strong Is Cameo Communications' Balance Sheet?

The latest balance sheet data shows that Cameo Communications had liabilities of NT$619.6m due within a year, and liabilities of NT$504.2m falling due after that. Offsetting these obligations, it had cash of NT$612.1m as well as receivables valued at NT$325.0m due within 12 months. So its liabilities total NT$186.6m more than the combination of its cash and short-term receivables.

Of course, Cameo Communications has a market capitalization of NT$3.60b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Cameo Communications 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 you can't view debt in total isolation; since Cameo Communications will need earnings to service that debt. 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, Cameo Communications made a loss at the EBIT level, and saw its revenue drop to NT$1.1b, which is a fall of 68%. That makes us nervous, to say the least.

So How Risky Is Cameo Communications?

Although Cameo Communications had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$7.5m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Cameo Communications 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.