Troy Information Technology (SZSE:300366) Is Carrying A Fair Bit Of Debt

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 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 Troy Information Technology Co., Ltd. (SZSE:300366) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Troy Information Technology

How Much Debt Does Troy Information Technology Carry?

The image below, which you can click on for greater detail, shows that Troy Information Technology had debt of CN¥728.4m at the end of March 2024, a reduction from CN¥871.4m over a year. However, it does have CN¥237.2m in cash offsetting this, leading to net debt of about CN¥491.2m.

How Healthy Is Troy Information Technology's Balance Sheet?

According to the last reported balance sheet, Troy Information Technology had liabilities of CN¥1.67b due within 12 months, and liabilities of CN¥19.8m due beyond 12 months. On the other hand, it had cash of CN¥237.2m and CN¥1.09b worth of receivables due within a year. So its liabilities total CN¥364.9m more than the combination of its cash and short-term receivables.

Since publicly traded Troy Information Technology shares are worth a total of CN¥4.77b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Troy Information Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Troy Information Technology made a loss at the EBIT level, and saw its revenue drop to CN¥1.4b, which is a fall of 29%. That makes us nervous, to say the least.

Caveat Emptor

While Troy Information Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥396m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥32m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Troy Information Technology has 1 warning sign we think you should be aware of.

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.

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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.