Is Truking Technology (SZSE:300358) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Truking Technology Limited (SZSE:300358) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Truking Technology

How Much Debt Does Truking Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Truking Technology had debt of CN¥664.2m, up from CN¥372.9m in one year. But it also has CN¥743.6m in cash to offset that, meaning it has CN¥79.4m net cash.

How Healthy Is Truking Technology's Balance Sheet?

According to the last reported balance sheet, Truking Technology had liabilities of CN¥5.86b due within 12 months, and liabilities of CN¥717.7m due beyond 12 months. Offsetting this, it had CN¥743.6m in cash and CN¥2.49b in receivables that were due within 12 months. So it has liabilities totalling CN¥3.34b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥5.55b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Truking Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Truking Technology's saving grace is its low debt levels, because its EBIT has tanked 43% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Truking Technology'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Truking Technology 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. In the last three years, Truking Technology created free cash flow amounting to 9.1% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While Truking Technology does have more liabilities than liquid assets, it also has net cash of CN¥79.4m. So although we see some areas for improvement, we're not too worried about Truking Technology's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Truking Technology has 4 warning signs (and 1 which shouldn't be ignored) we think 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.