TES Touch Embedded Solutions (Xiamen) (SZSE:003019) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that TES Touch Embedded Solutions (Xiamen) Co., Ltd. (SZSE:003019) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for TES Touch Embedded Solutions (Xiamen)

How Much Debt Does TES Touch Embedded Solutions (Xiamen) Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 TES Touch Embedded Solutions (Xiamen) had CN¥252.0m of debt, an increase on CN¥201.9m, over one year. But on the other hand it also has CN¥431.8m in cash, leading to a CN¥179.8m net cash position.

How Strong Is TES Touch Embedded Solutions (Xiamen)'s Balance Sheet?

The latest balance sheet data shows that TES Touch Embedded Solutions (Xiamen) had liabilities of CN¥770.3m due within a year, and liabilities of CN¥78.0m falling due after that. Offsetting this, it had CN¥431.8m in cash and CN¥487.8m in receivables that were due within 12 months. So it can boast CN¥71.3m more liquid assets than total liabilities.

This state of affairs indicates that TES Touch Embedded Solutions (Xiamen)'s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥3.84b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that TES Touch Embedded Solutions (Xiamen) has more cash than debt is arguably a good indication that it can manage its debt safely.

While TES Touch Embedded Solutions (Xiamen) doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since TES Touch Embedded Solutions (Xiamen) will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. TES Touch Embedded Solutions (Xiamen) 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, TES Touch Embedded Solutions (Xiamen) generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that TES Touch Embedded Solutions (Xiamen) has net cash of CN¥179.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in CN¥378m. So is TES Touch Embedded Solutions (Xiamen)'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. Case in point: We've spotted 1 warning sign for TES Touch Embedded Solutions (Xiamen) 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.

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