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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that China Transinfo Technology Co., Ltd (SZSE:002373) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.
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?
Zooming in on the latest balance sheet data, we can see that China Transinfo Technology had liabilities of CN¥5.89b due within 12 months and liabilities of CN¥399.9m due beyond that. On the other hand, it had cash of CN¥4.27b and CN¥4.05b worth of receivables due within a year. So it actually has CN¥2.03b more liquid assets than total liabilities.
This short term liquidity is a sign that China Transinfo Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that China Transinfo Technology has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if China Transinfo Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year China Transinfo Technology had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥7.4b. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for China Transinfo Technology that you should be aware of before investing here.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.