Is Teemsun TechnologyLtd (SZSE:301571) 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.' 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. We note that Teemsun Technology Co.,Ltd (SZSE:301571) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. 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.

Check out our latest analysis for Teemsun TechnologyLtd

How Much Debt Does Teemsun TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Teemsun TechnologyLtd had CN¥617.9m of debt, an increase on CN¥230.3m, over one year. However, it does have CN¥620.0m in cash offsetting this, leading to net cash of CN¥2.10m.

A Look At Teemsun TechnologyLtd's Liabilities

According to the last reported balance sheet, Teemsun TechnologyLtd had liabilities of CN¥747.5m due within 12 months, and liabilities of CN¥10.4m due beyond 12 months. On the other hand, it had cash of CN¥620.0m and CN¥714.8m worth of receivables due within a year. So it actually has CN¥576.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Teemsun TechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Teemsun TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Teemsun TechnologyLtd grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Teemsun TechnologyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Teemsun TechnologyLtd 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, Teemsun TechnologyLtd 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 it is always sensible to investigate a company's debt, in this case Teemsun TechnologyLtd has CN¥2.10m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 42% over the last year. So we are not troubled with Teemsun TechnologyLtd's debt use. 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. To that end, you should be aware of the 1 warning sign we've spotted with Teemsun TechnologyLtd .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.