Is Beijing Transtrue Technology (SZSE:002771) A Risky Investment?

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. Importantly, Beijing Transtrue Technology Inc. (SZSE:002771) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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 September 2024 Beijing Transtrue Technology had debt of CN¥114.3m, up from CN¥54.8m in one year. But it also has CN¥205.8m in cash to offset that, meaning it has CN¥91.5m net cash.

A Look At Beijing Transtrue Technology's Liabilities

We can see from the most recent balance sheet that Beijing Transtrue Technology had liabilities of CN¥390.2m falling due within a year, and liabilities of CN¥22.5m due beyond that. Offsetting these obligations, it had cash of CN¥205.8m as well as receivables valued at CN¥276.5m due within 12 months. So it can boast CN¥69.5m more liquid assets than total liabilities.

Having regard to Beijing Transtrue Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥3.75b company is short on cash, but still worth keeping an eye on the balance sheet. 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 5.3%, to CN¥469m. We would much prefer see growth.

So How Risky Is Beijing Transtrue Technology?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Beijing Transtrue Technology had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥8.0m of cash and made a loss of CN¥9.5m. But the saving grace is the CN¥91.5m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Beijing Transtrue Technology .

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.