Transtech Optelecom Science Holdings (HKG:9963) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Transtech Optelecom Science Holdings Limited (HKG:9963) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Transtech Optelecom Science Holdings

How Much Debt Does Transtech Optelecom Science Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Transtech Optelecom Science Holdings had HK$48.2m of debt in June 2022, down from HK$57.8m, one year before. On the flip side, it has HK$15.1m in cash leading to net debt of about HK$33.1m.

How Healthy Is Transtech Optelecom Science Holdings' Balance Sheet?

According to the last reported balance sheet, Transtech Optelecom Science Holdings had liabilities of HK$84.4m due within 12 months, and liabilities of HK$1.49m due beyond 12 months. Offsetting these obligations, it had cash of HK$15.1m as well as receivables valued at HK$185.9m due within 12 months. So it actually has HK$115.0m more liquid assets than total liabilities.

This surplus liquidity suggests that Transtech Optelecom Science Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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 Transtech Optelecom Science Holdings 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.

In the last year Transtech Optelecom Science Holdings had a loss before interest and tax, and actually shrunk its revenue by 20%, to HK$175m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Transtech Optelecom Science Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$117m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But a profit would do more to inspire us to research the business more closely. This one is a bit too risky for our liking. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Transtech Optelecom Science Holdings (1 is significant!) that you should be aware of before investing here.

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.