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

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 Transtech Optelecom Science Holdings Limited (HKG:9963) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out the opportunities and risks within the HK Communications industry.

What Is Transtech Optelecom Science Holdings's Net Debt?

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. However, it does have HK$15.1m in cash offsetting this, leading to net debt of about HK$33.1m.

How Strong Is Transtech Optelecom Science Holdings' Balance Sheet?

The latest balance sheet data shows that Transtech Optelecom Science Holdings had liabilities of HK$84.4m due within a year, and liabilities of HK$1.49m falling due after that. On the other hand, it had cash of HK$15.1m and HK$185.9m worth of receivables due within a year. So it can boast HK$115.0m more liquid assets than total liabilities.

This surplus strongly suggests that Transtech Optelecom Science Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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). Its EBIT loss was a whopping HK$117m. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Transtech Optelecom Science Holdings (including 1 which can't be ignored) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.