Is Transwarp Technology (Shanghai)Ltd (SHSE:688031) Using Too Much Debt?

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.' 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. As with many other companies Transwarp Technology (Shanghai) Co.,Ltd. (SHSE:688031) makes use of debt. 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Transwarp Technology (Shanghai)Ltd

What Is Transwarp Technology (Shanghai)Ltd's Debt?

As you can see below, Transwarp Technology (Shanghai)Ltd had CN¥38.0m of debt at June 2024, down from CN¥42.5m a year prior. But it also has CN¥767.3m in cash to offset that, meaning it has CN¥729.3m net cash.

How Strong Is Transwarp Technology (Shanghai)Ltd's Balance Sheet?

The latest balance sheet data shows that Transwarp Technology (Shanghai)Ltd had liabilities of CN¥206.9m due within a year, and liabilities of CN¥58.4m falling due after that. Offsetting this, it had CN¥767.3m in cash and CN¥407.4m in receivables that were due within 12 months. So it can boast CN¥909.5m more liquid assets than total liabilities.

This excess liquidity suggests that Transwarp Technology (Shanghai)Ltd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Transwarp Technology (Shanghai)Ltd has more cash than debt is arguably a good indication that it can manage its debt safely. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Transwarp Technology (Shanghai)Ltd reported revenue of CN¥493m, which is a gain of 19%, 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?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Transwarp Technology (Shanghai)Ltd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥524m and booked a CN¥290m accounting loss. However, it has net cash of CN¥729.3m, so it has a bit of time before it will need more capital. 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. 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. For example Transwarp Technology (Shanghai)Ltd has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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.