Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Transportation Telecommunication & Information Development Inc.Ltd.Zhejiang (SZSE:300469) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Transportation Telecommunication & Information DevelopmentLtd.Zhejiang Carry?

As you can see below, Transportation Telecommunication & Information DevelopmentLtd.Zhejiang had CN¥193.0m of debt at September 2024, down from CN¥309.4m a year prior. However, it does have CN¥331.7m in cash offsetting this, leading to net cash of CN¥138.7m.

How Strong Is Transportation Telecommunication & Information DevelopmentLtd.Zhejiang's Balance Sheet?

The latest balance sheet data shows that Transportation Telecommunication & Information DevelopmentLtd.Zhejiang had liabilities of CN¥486.3m due within a year, and liabilities of CN¥78.8m falling due after that. Offsetting these obligations, it had cash of CN¥331.7m as well as receivables valued at CN¥162.6m due within 12 months. So its liabilities total CN¥70.7m more than the combination of its cash and short-term receivables.

Having regard to Transportation Telecommunication & Information DevelopmentLtd.Zhejiang's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥7.49b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Transportation Telecommunication & Information DevelopmentLtd.Zhejiang also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Transportation Telecommunication & Information DevelopmentLtd.Zhejiang'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.

Over 12 months, Transportation Telecommunication & Information DevelopmentLtd.Zhejiang made a loss at the EBIT level, and saw its revenue drop to CN¥265m, which is a fall of 2.2%. We would much prefer see growth.

So How Risky Is Transportation Telecommunication & Information DevelopmentLtd.Zhejiang?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Transportation Telecommunication & Information DevelopmentLtd.Zhejiang had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥165m of cash and made a loss of CN¥184m. However, it has net cash of CN¥138.7m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 2 warning signs for Transportation Telecommunication & Information DevelopmentLtd.Zhejiang you should be aware of.

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.