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.' 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 TRS Information Technology Co., Ltd. (SZSE:300229) does have debt on its balance sheet. But is this debt a concern to shareholders?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is TRS Information Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 TRS Information Technology had CN¥30.6m of debt, an increase on CN¥10.0m, over one year. But on the other hand it also has CN¥478.0m in cash, leading to a CN¥447.4m net cash position.

How Strong Is TRS Information Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TRS Information Technology had liabilities of CN¥304.4m due within 12 months and liabilities of CN¥20.2m due beyond that. Offsetting this, it had CN¥478.0m in cash and CN¥693.1m in receivables that were due within 12 months. So it can boast CN¥846.5m more liquid assets than total liabilities.

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

It is just as well that TRS Information Technology's load is not too heavy, because its EBIT was down 93% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine TRS Information Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. TRS Information Technology 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, TRS Information Technology burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case TRS Information Technology has CN¥447.4m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about TRS Information Technology's balance sheet. 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. Case in point: We've spotted 3 warning signs for TRS Information Technology you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.