China Transinfo Technology (SZSE:002373) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 China Transinfo Technology Co., Ltd (SZSE:002373) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, 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.

View our latest analysis for China Transinfo Technology

What Is China Transinfo Technology's Net Debt?

As you can see below, China Transinfo Technology had CN¥915.9m of debt at March 2024, down from CN¥979.5m a year prior. However, it does have CN¥4.27b in cash offsetting this, leading to net cash of CN¥3.35b.

How Strong Is China Transinfo Technology's Balance Sheet?

The latest balance sheet data shows that China Transinfo Technology had liabilities of CN¥5.51b due within a year, and liabilities of CN¥225.2m falling due after that. Offsetting this, it had CN¥4.27b in cash and CN¥4.06b in receivables that were due within 12 months. So it actually has CN¥2.59b more liquid assets than total liabilities.

This surplus suggests that China Transinfo Technology is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, China Transinfo Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Although China Transinfo Technology made a loss at the EBIT level, last year, it was also good to see that it generated CN¥115m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if China Transinfo Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While China Transinfo 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. Happily for any shareholders, China Transinfo Technology actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China Transinfo Technology has net cash of CN¥3.35b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥370m, being 323% of its EBIT. So we don't think China Transinfo Technology's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of China Transinfo Technology's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com