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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that China Transinfo Technology Co., Ltd (SZSE:002373) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. When we think about a company's use of debt, we first look at cash and debt together.
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How Much Debt Does China Transinfo Technology Carry?
The image below, which you can click on for greater detail, shows that China Transinfo Technology had debt of CN¥998.6m at the end of September 2023, a reduction from CN¥1.11b over a year. However, it does have CN¥4.27b in cash offsetting this, leading to net cash of CN¥3.27b.
How Strong Is China Transinfo Technology's Balance Sheet?
The latest balance sheet data shows that China Transinfo Technology had liabilities of CN¥5.89b due within a year, and liabilities of CN¥399.9m falling due after that. Offsetting these obligations, it had cash of CN¥4.27b as well as receivables valued at CN¥4.05b due within 12 months. So it actually has CN¥2.03b more liquid assets than total liabilities.
This surplus suggests that China Transinfo Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, China Transinfo Technology boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if China Transinfo Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, China Transinfo Technology made a loss at the EBIT level, and saw its revenue drop to CN¥7.4b, which is a fall of 11%. That's not what we would hope to see.
So How Risky Is China Transinfo Technology?
While China Transinfo Technology lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥28m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - China Transinfo Technology has 1 warning sign we think you should be aware of.
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.