Is Triangle TyreLtd (SHSE:601163) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Triangle Tyre Co.,Ltd (SHSE:601163) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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.

See our latest analysis for Triangle TyreLtd

What Is Triangle TyreLtd's Net Debt?

As you can see below, Triangle TyreLtd had CN¥845.2m of debt at March 2024, down from CN¥1.50b a year prior. However, it does have CN¥2.04b in cash offsetting this, leading to net cash of CN¥1.20b.

A Look At Triangle TyreLtd's Liabilities

The latest balance sheet data shows that Triangle TyreLtd had liabilities of CN¥5.20b due within a year, and liabilities of CN¥410.2m falling due after that. Offsetting these obligations, it had cash of CN¥2.04b as well as receivables valued at CN¥2.00b due within 12 months. So its liabilities total CN¥1.56b more than the combination of its cash and short-term receivables.

Given Triangle TyreLtd has a market capitalization of CN¥12.0b, 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. Despite its noteworthy liabilities, Triangle TyreLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Triangle TyreLtd grew its EBIT by 86% over the last twelve months, and that growth will make it easier to handle its debt. 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 Triangle TyreLtd 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Triangle TyreLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Triangle TyreLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Triangle TyreLtd does have more liabilities than liquid assets, it also has net cash of CN¥1.20b. And it impressed us with free cash flow of CN¥1.6b, being 137% of its EBIT. So we don't think Triangle TyreLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Triangle TyreLtd you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com