Does Contel Technology (HKG:1912) Have A Healthy Balance Sheet?

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. Importantly, Contel Technology Company Limited (HKG:1912) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Contel Technology

How Much Debt Does Contel Technology Carry?

As you can see below, at the end of December 2023, Contel Technology had US$12.7m of debt, up from US$11.1m a year ago. Click the image for more detail. On the flip side, it has US$2.54m in cash leading to net debt of about US$10.2m.

A Look At Contel Technology's Liabilities

According to the last reported balance sheet, Contel Technology had liabilities of US$31.2m due within 12 months, and liabilities of US$415.0k due beyond 12 months. On the other hand, it had cash of US$2.54m and US$19.1m worth of receivables due within a year. So it has liabilities totalling US$9.98m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$6.31m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Contel Technology would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Contel Technology'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, Contel Technology made a loss at the EBIT level, and saw its revenue drop to US$66m, which is a fall of 46%. To be frank that doesn't bode well.

Caveat Emptor

While Contel Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$6.1m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of US$9.7m. In the meantime, we consider the stock to be risky. 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. For example, we've discovered 4 warning signs for Contel Technology that you should be aware of before investing here.

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.