We Think Xi'an Triangle DefenseLtd (SZSE:300775) Can Stay On Top Of Its Debt

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.' 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. As with many other companies Xi'an Triangle Defense Co.,Ltd (SZSE:300775) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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 2023 Xi'an Triangle DefenseLtd had CN¥1.21b of debt, an increase on CN¥894.9m, over one year. But on the other hand it also has CN¥3.28b in cash, leading to a CN¥2.07b net cash position.

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¥1.82b falling due within a year, and liabilities of CN¥954.5m due beyond that. Offsetting these obligations, it had cash of CN¥3.28b as well as receivables valued at CN¥2.43b due within 12 months. So it can boast CN¥2.93b more liquid assets than total liabilities.

It's good to see that Xi'an Triangle DefenseLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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!

Also good is that Xi'an Triangle DefenseLtd grew its EBIT at 14% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 company can only pay off debt with cold hard cash, not accounting profits. Xi'an Triangle DefenseLtd 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. Considering the last three years, Xi'an Triangle DefenseLtd actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

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¥2.07b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 14% in the last twelve months. So we don't have any problem with Xi'an Triangle DefenseLtd's use of debt. 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. Be aware that Xi'an Triangle DefenseLtd is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.