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

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 note that Shenzhen Transsion Holdings Co., Ltd. (SHSE:688036) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

As you can see below, Shenzhen Transsion Holdings had CN¥2.52b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥24.9b in cash to offset that, meaning it has CN¥22.4b net cash.

How Strong Is Shenzhen Transsion Holdings' Balance Sheet?

The latest balance sheet data shows that Shenzhen Transsion Holdings had liabilities of CN¥22.2b due within a year, and liabilities of CN¥4.02b falling due after that. Offsetting this, it had CN¥24.9b in cash and CN¥3.59b in receivables that were due within 12 months. So it can boast CN¥2.25b more liquid assets than total liabilities.

This short term liquidity is a sign that Shenzhen Transsion Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shenzhen Transsion Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Shenzhen Transsion Holdings has boosted its EBIT by 32%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shenzhen Transsion Holdings 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Shenzhen Transsion Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Shenzhen Transsion Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Shenzhen Transsion Holdings has net cash of CN¥22.4b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.0b, being 108% of its EBIT. So we don't think Shenzhen Transsion Holdings's use of debt 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. Case in point: We've spotted 1 warning sign for Shenzhen Transsion Holdings you should be aware of.

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.