Is CloudWalk Technology (SHSE:688327) being weighed down by its debt burden?

Legendary fund manager Li Lu (backed by Charlie Munger) once said, “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 examining this risk, since debt is often involved when the company collapses. Cloudwalk Technology Co., Ltd. (SHSE:688327) does have debt, but the real question is whether this debt makes the company risky.

Why is debt risky?

Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either with recapitalization or with its own cash flow. Ultimately, if a company can’t meet its legal obligations to repay its debt, shareholders may get nothing. However, a more common (but still costly) situation is where a company has to dilute shareholders’ equity at a cheap price just to get the debt under control. Of course, debt can be an important tool for companies, especially capital heavy companies. The first thing to do when considering how much debt a company uses is to look at cash and debt together.

Read our latest analysis on CloudWalk Technology

How much debt does CloudWalk Technology have?

The image below (which you can click on for greater detail) shows that CloudWalk Technology had debt of RMB606.3m at the end of March 2024, down from RMB973.8m over a year ago. However, the balance sheet shows that it had cash of RMB1.31b, so effectively net cash is RMB701.7m.

Does CloudWalk Technology have a healthy balance sheet?

The latest balance sheet data shows that Cloudwalk Technology had liabilities of RMB1.07b due within a year, and liabilities of RMB246.3m due beyond that. Offsetting this, it had cash of RMB1.31b and accounts receivable of RMB679.9m due within 12 months. This means the company has current assets of RMB672.1m. total liabilities.

This near-term liquidity suggests that CloudWalk Technology’s balance sheet is not under strain, meaning the company can likely pay off its debt easily. Simply put, CloudWalk Technology boasts net cash, so it cannot be said to be heavily indebted. The balance sheet is the obvious place to look when analysing debt. But debt can’t be viewed in complete isolation, as CloudWalk Technology needs earnings to pay down its debt. Therefore, it’s definitely worth looking at earnings trends when considering debt. Click here to see an interactive snapshot.

Although CloudWalk Technology wasn’t profitable at an EBIT level last year, it managed to grow its revenue by 78% to 637m, so with any luck the company will be able to grow to profitability.

So how dangerous is CloudWalk technology?

In essence, loss-making companies are riskier than those that have been profitable for many years. Indeed, over the past 12 months, CloudWalk Technology posted a loss in earnings before interest and tax (EBIT). Also, over the same period, free cash outflow was negative RMB476 million, resulting in an accounting loss of RMB660 million. This makes the company somewhat riskier, but don’t forget that it has net cash of RMB701.7 million. This means the company can continue to spend at its current pace for more than two years. CloudWalk Technology’s revenue growth has been impressive over the past year, and it could well be in a position to become profitable in due course. Investing before profits are made exposes shareholders to more risk in search of greater rewards. With riskier companies like CloudWalk Technology, I always look at the long-term earnings and revenue trends. Fortunately, you can click to see an interactive graph of the company’s earnings, revenue, and operating cash flow.

At the end of the day, it’s often better to focus on companies that are free from net debt, and you can access our special list of such companies – all with a track record of profit growth – for free.

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This article by Simply Wall St is general in nature. We use only unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives, or your financial situation. We seek to provide long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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