Is Transwarp Technology (Shanghai)Ltd (SHSE:688031) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Transwarp Technology (Shanghai) Co.,Ltd. (SHSE:688031) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. 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.

See our latest analysis for Transwarp Technology (Shanghai)Ltd

How Much Debt Does Transwarp Technology (Shanghai)Ltd Carry?

You can click the graphic below for the historical numbers, but it shows that Transwarp Technology (Shanghai)Ltd had CN¥58.0m of debt in September 2024, down from CN¥67.5m, one year before. But it also has CN¥620.5m in cash to offset that, meaning it has CN¥562.5m net cash.

A Look At Transwarp Technology (Shanghai)Ltd's Liabilities

We can see from the most recent balance sheet that Transwarp Technology (Shanghai)Ltd had liabilities of CN¥222.4m falling due within a year, and liabilities of CN¥52.0m due beyond that. Offsetting these obligations, it had cash of CN¥620.5m as well as receivables valued at CN¥383.0m due within 12 months. So it can boast CN¥729.2m more liquid assets than total liabilities.

This surplus suggests that Transwarp Technology (Shanghai)Ltd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Transwarp Technology (Shanghai)Ltd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Transwarp Technology (Shanghai)Ltd'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.

Over 12 months, Transwarp Technology (Shanghai)Ltd reported revenue of CN¥478m, which is a gain of 13%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Transwarp Technology (Shanghai)Ltd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Transwarp Technology (Shanghai)Ltd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥460m of cash and made a loss of CN¥312m. But at least it has CN¥562.5m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that Transwarp Technology (Shanghai)Ltd is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

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.