Li Lu, an external fund manager backed by Berkshire Hathaway's Charlie Munger, says, “The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.'' It has even been stated. It's only natural to consider a company's balance sheet when you consider how risky it is, since debt is often involved when a business collapses. the important thing is, Contel Technology Co., Ltd. (HKG:1912) is in debt. But is this debt a concern for shareholders?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it is at their mercy. Part of capitalism is the process of “creative destruction” in which failing companies are ruthlessly liquidated by bankers. But a more common (but still expensive) situation is when a company needs to dilute shareholders at a cheap share price just to manage its debt. Having said that, the most common situation is one in which a company manages its debt reasonably well and to its own advantage. The first thing to do when considering how much debt a company uses is to look at its cash and debt together.

Check out our latest analysis for Contel Technology.

How much debt does Contel Technology have?

As you can see below, at the end of December 2023, Contel Technology had debt of US$12.7m, up from US$11.1m a year ago. Click on the image for more information. On the other hand, the company has cash of US$2.54m in him, leading to net debt of around US$10.2m.

Debt capital history analysis
SEHK:1912 Transition from debt to equity March 31, 2024

Looking back at Contel Technology's responsibilities

According to its last reported balance sheet, Contel Technology had liabilities of US$31.2m due within 12 months, and liabilities of US$4.15m due beyond 12 months. On the other hand, it had cash of US$2.54m and receivables worth US$19.1m due within a year. So it has liabilities of US$9.98m more than its cash and short-term receivables, combined.

The deficit casts a shadow over the $6.31 million company like a colossus towering over the average person. So we will definitely be monitoring its balance sheet closely. After all, if Contel Technology had to repay its creditors today, it would likely require a major recapitalization. The balance sheet is clearly the area to focus on when analyzing debt. However, it is Contel Technology's earnings that will influence how its balance sheet holds up in the future. So if you are keen to discover more about the company's earnings, it might be worth checking this graph of its long-term earnings trend.

Over the twelve month period, Contel Technology made a loss at the EBIT level, and its revenue fell by 46% to US$66m. Frankly, that doesn't bode well.

Buyer's responsibility burden

While Contel Technology's declining sales are as heartwarming as a wet blanket, the loss in earnings before interest and tax (EBIT) is perhaps even less appealing. EBIT loss was a whopping USD 6.1 million. Juxtaposing this with significant debt, we're not particularly confident in the company. Before I get too interested in the stock, I'd like to see some strong improvement in the short term. For example, we don't want to see a repeat of last year's US$9.7 million loss. Until then, we think the stock is risky. There's no question 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 discovered that 4 warning signs for Contel Technology What you need to know before investing here.

If you're more interested in fast-growing companies with rock-solid balance sheets, 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 using only unbiased methodologies, and the articles are not intended as financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.

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