Here's Why Xi'an Triangle DefenseLtd (SZSE:300775) Has A Meaningful Debt Burden

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.' 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. Importantly, Xi'an Triangle Defense Co.,Ltd (SZSE:300775) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Xi'an Triangle DefenseLtd

What Is Xi'an Triangle DefenseLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Xi'an Triangle DefenseLtd had debt of CN¥2.02b, up from CN¥1.21b in one year. However, its balance sheet shows it holds CN¥3.14b in cash, so it actually has CN¥1.13b net cash.

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 this, it had CN¥3.14b in cash and CN¥2.45b in receivables that were due within 12 months. So it can boast CN¥2.07b more liquid assets than total liabilities.

This short term liquidity is a sign that Xi'an Triangle DefenseLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 43% 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Xi'an Triangle DefenseLtd has CN¥1.13b in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Xi'an Triangle DefenseLtd's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Xi'an Triangle DefenseLtd (including 2 which shouldn't be ignored) .

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.