Here's Why Xi'an Triangle DefenseLtd (SZSE:300775) Can Manage Its Debt Responsibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Xi'an Triangle Defense Co.,Ltd (SZSE:300775) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Xi'an Triangle DefenseLtd

How Much Debt Does Xi'an Triangle DefenseLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Xi'an Triangle DefenseLtd had CN¥2.02b of debt, an increase on CN¥1.21b, over one year. However, it does have CN¥3.14b in cash offsetting this, leading to net cash of CN¥1.13b.

How Strong Is Xi'an Triangle DefenseLtd's Balance Sheet?

We can see from the most recent balance sheet that Xi'an Triangle DefenseLtd had liabilities of CN¥2.48b falling due within a year, and liabilities of CN¥1.05b due beyond that. Offsetting these obligations, it had cash of CN¥3.14b as well as receivables valued at CN¥2.46b due within 12 months. So it can boast CN¥2.07b more liquid assets than total liabilities.

This excess liquidity suggests that Xi'an Triangle DefenseLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Xi'an Triangle DefenseLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Xi'an Triangle DefenseLtd if management cannot prevent a repeat of the 57% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Xi'an Triangle DefenseLtd's ability to maintain a healthy balance sheet going forward. 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. While Xi'an Triangle DefenseLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Xi'an Triangle DefenseLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Xi'an Triangle DefenseLtd has net cash of CN¥1.13b, as well as more liquid assets than liabilities. So we don't have any problem with Xi'an Triangle DefenseLtd's use of debt. 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. Case in point: We've spotted 2 warning signs for Xi'an Triangle DefenseLtd you should be aware of, and 1 of them makes us a bit uncomfortable.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.