These 4 Measures Indicate That TRS Information Technology (SZSE:300229) Is Using Debt Extensively

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that TRS Information Technology Co., Ltd. (SZSE:300229) does use debt in its business. 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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for TRS Information Technology

How Much Debt Does TRS Information Technology Carry?

The image below, which you can click on for greater detail, shows that at March 2024 TRS Information Technology had debt of CN¥30.6m, up from CN¥10.0m in one year. However, its balance sheet shows it holds CN¥478.0m in cash, so it actually has CN¥447.4m net cash.

How Healthy Is TRS Information Technology's Balance Sheet?

According to the last reported balance sheet, TRS Information Technology had liabilities of CN¥304.4m due within 12 months, and liabilities of CN¥20.2m due beyond 12 months. Offsetting this, it had CN¥478.0m in cash and CN¥693.1m in receivables that were due within 12 months. So it actually has CN¥846.5m more liquid assets than total liabilities.

This surplus suggests that TRS Information Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, TRS Information Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that TRS Information Technology's load is not too heavy, because its EBIT was down 93% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine TRS Information 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. TRS Information 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. During the last three years, TRS Information Technology burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case TRS Information Technology has CN¥447.4m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about TRS Information Technology's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with TRS Information Technology , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.