Is Transtech Optelecom Science Holdings (HKG:9963) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Transtech Optelecom Science Holdings Limited (HKG:9963) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Transtech Optelecom Science Holdings

What Is Transtech Optelecom Science Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Transtech Optelecom Science Holdings had HK$59.2m of debt, an increase on HK$20.5m, over one year. But on the other hand it also has HK$84.9m in cash, leading to a HK$25.7m net cash position.

A Look At Transtech Optelecom Science Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Transtech Optelecom Science Holdings had liabilities of HK$118.2m due within 12 months and liabilities of HK$4.32m due beyond that. On the other hand, it had cash of HK$84.9m and HK$290.9m worth of receivables due within a year. So it can boast HK$253.3m more liquid assets than total liabilities.

This luscious liquidity implies that Transtech Optelecom Science Holdings' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Transtech Optelecom Science Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Transtech Optelecom Science Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Transtech Optelecom Science Holdings had a loss before interest and tax, and actually shrunk its revenue by 41%, to HK$156m. To be frank that doesn't bode well.

So How Risky Is Transtech Optelecom Science Holdings?

While Transtech Optelecom Science Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$4.4m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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 4 warning signs with Transtech Optelecom Science Holdings (at least 1 which doesn't sit too well with us) , 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.