Does Shenzhen Transsion Holdings (SHSE:688036) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Shenzhen Transsion Holdings Co., Ltd. (SHSE:688036) does use debt in its business. But the real question is whether this debt is making the company risky.

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shenzhen Transsion Holdings

What Is Shenzhen Transsion Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Shenzhen Transsion Holdings had CN¥2.68b of debt, an increase on CN¥2.49b, over one year. However, its balance sheet shows it holds CN¥26.4b in cash, so it actually has CN¥23.7b net cash.

How Strong Is Shenzhen Transsion Holdings' Balance Sheet?

We can see from the most recent balance sheet that Shenzhen Transsion Holdings had liabilities of CN¥23.7b falling due within a year, and liabilities of CN¥4.21b due beyond that. Offsetting this, it had CN¥26.4b in cash and CN¥2.70b in receivables that were due within 12 months. So it can boast CN¥1.14b more liquid assets than total liabilities.

Having regard to Shenzhen Transsion Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥113.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Shenzhen Transsion Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Shenzhen Transsion Holdings grew its EBIT by 243% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Shenzhen Transsion Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Shenzhen Transsion Holdings 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. Over the last three years, Shenzhen Transsion Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shenzhen Transsion Holdings has CN¥23.7b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥8.9b, being 111% of its EBIT. So is Shenzhen Transsion Holdings's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Shenzhen Transsion Holdings , and understanding them should be part of your investment process.

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.