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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that Transwarp Technology (Shanghai) Co.,Ltd. (SHSE:688031) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Transwarp Technology (Shanghai)Ltd

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

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Transwarp Technology (Shanghai)Ltd had CN¥55.5m of debt, an increase on CN¥30.0m, over one year. However, its balance sheet shows it holds CN¥799.7m in cash, so it actually has CN¥744.2m net cash.

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

Zooming in on the latest balance sheet data, we can see that Transwarp Technology (Shanghai)Ltd had liabilities of CN¥209.9m due within 12 months and liabilities of CN¥57.4m due beyond that. Offsetting this, it had CN¥799.7m in cash and CN¥402.3m in receivables that were due within 12 months. So it actually has CN¥934.7m more liquid assets than total liabilities.

It's good to see that Transwarp Technology (Shanghai)Ltd 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. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Transwarp Technology (Shanghai)Ltd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Transwarp Technology (Shanghai)Ltd wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to CN¥511m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Transwarp Technology (Shanghai)Ltd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Transwarp Technology (Shanghai)Ltd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥529m of cash and made a loss of CN¥291m. However, it has net cash of CN¥744.2m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Transwarp Technology (Shanghai)Ltd may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Transwarp Technology (Shanghai)Ltd 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.

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