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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 note that Time Interconnect Technology Limited (HKG:1729) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Time Interconnect Technology
How Much Debt Does Time Interconnect Technology Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Time Interconnect Technology had HK$49.2m of debt, an increase on HK$41.5m, over one year. However, it does have HK$227.9m in cash offsetting this, leading to net cash of HK$178.6m.
How Strong Is Time Interconnect Technology's Balance Sheet?
The latest balance sheet data shows that Time Interconnect Technology had liabilities of HK$340.7m due within a year, and liabilities of HK$817.0k falling due after that. On the other hand, it had cash of HK$227.9m and HK$195.9m worth of receivables due within a year. So it can boast HK$82.3m more liquid assets than total liabilities.
This surplus suggests that Time Interconnect Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Time Interconnect Technology has more cash than debt is arguably a good indication that it can manage its debt safely.
But the bad news is that Time Interconnect Technology has seen its EBIT plunge 14% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is Time Interconnect 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.