Here's Why China Transinfo Technology (SZSE:002373) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 China Transinfo Technology Co., Ltd (SZSE:002373) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for China Transinfo Technology

What Is China Transinfo Technology's Net Debt?

The image below, which you can click on for greater detail, shows that China Transinfo Technology had debt of CN¥688.3m at the end of September 2024, a reduction from CN¥998.6m over a year. But it also has CN¥3.84b in cash to offset that, meaning it has CN¥3.15b net cash.

A Look At China Transinfo Technology's Liabilities

The latest balance sheet data shows that China Transinfo Technology had liabilities of CN¥5.28b due within a year, and liabilities of CN¥274.9m falling due after that. On the other hand, it had cash of CN¥3.84b and CN¥4.28b worth of receivables due within a year. So it actually has CN¥2.57b more liquid assets than total liabilities.

This excess liquidity suggests that China Transinfo Technology is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that China Transinfo Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Although China Transinfo Technology made a loss at the EBIT level, last year, it was also good to see that it generated CN¥93m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine China Transinfo Technology'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. China Transinfo Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last year, China Transinfo Technology created free cash flow amounting to 7.4% 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 it is always sensible to investigate a company's debt, in this case China Transinfo Technology has CN¥3.15b in net cash and a decent-looking balance sheet. So we don't have any problem with China Transinfo Technology's use of debt. 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.

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.