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 Tianjin Futong Information Science&Technology Co.,Ltd. (SZSE:000836) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tianjin Futong Information Science&TechnologyLtd

How Much Debt Does Tianjin Futong Information Science&TechnologyLtd Carry?

The chart below, which you can click on for greater detail, shows that Tianjin Futong Information Science&TechnologyLtd had CN¥813.5m in debt in September 2023; about the same as the year before. However, because it has a cash reserve of CN¥60.0m, its net debt is less, at about CN¥753.6m.

A Look At Tianjin Futong Information Science&TechnologyLtd's Liabilities

The latest balance sheet data shows that Tianjin Futong Information Science&TechnologyLtd had liabilities of CN¥1.23b due within a year, and liabilities of CN¥238.2m falling due after that. Offsetting this, it had CN¥60.0m in cash and CN¥1.09b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥321.1m.

Given Tianjin Futong Information Science&TechnologyLtd has a market capitalization of CN¥3.83b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Tianjin Futong Information Science&TechnologyLtd 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, Tianjin Futong Information Science&TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 15%. That's not what we would hope to see.

Caveat Emptor

Not only did Tianjin Futong Information Science&TechnologyLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥14m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥59m into a profit. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Tianjin Futong Information Science&TechnologyLtd you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.