Does Beijing Transtrue Technology (SZSE:002771) Have A Healthy Balance Sheet?

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.' 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 Beijing Transtrue Technology Inc. (SZSE:002771) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Beijing Transtrue Technology

How Much Debt Does Beijing Transtrue Technology Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Beijing Transtrue Technology had debt of CN¥86.9m, up from CN¥47.2m in one year. However, its balance sheet shows it holds CN¥191.6m in cash, so it actually has CN¥104.7m net cash.

How Strong Is Beijing Transtrue Technology's Balance Sheet?

We can see from the most recent balance sheet that Beijing Transtrue Technology had liabilities of CN¥348.1m falling due within a year, and liabilities of CN¥21.0m due beyond that. Offsetting this, it had CN¥191.6m in cash and CN¥305.4m in receivables that were due within 12 months. So it can boast CN¥127.9m more liquid assets than total liabilities.

This surplus suggests that Beijing Transtrue Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Beijing Transtrue Technology 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 it is Beijing Transtrue Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Beijing Transtrue Technology had a loss before interest and tax, and actually shrunk its revenue by 18%, to CN¥461m. That's not what we would hope to see.

So How Risky Is Beijing Transtrue Technology?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Beijing Transtrue Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥42m of cash and made a loss of CN¥27m. Given it only has net cash of CN¥104.7m, the company may need to raise more capital if it doesn't reach break-even soon. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Beijing Transtrue Technology has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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.