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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Triductor Technology (Suzhou) Inc. (SHSE:688259) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Triductor Technology (Suzhou)'s Debt?

As you can see below, at the end of June 2024, Triductor Technology (Suzhou) had CN¥161.1m of debt, up from CN¥60.8m a year ago. Click the image for more detail. But on the other hand it also has CN¥461.7m in cash, leading to a CN¥300.6m net cash position.

How Strong Is Triductor Technology (Suzhou)'s Balance Sheet?

We can see from the most recent balance sheet that Triductor Technology (Suzhou) had liabilities of CN¥532.8m falling due within a year, and liabilities of CN¥42.8m due beyond that. Offsetting this, it had CN¥461.7m in cash and CN¥131.5m in receivables that were due within 12 months. So it actually has CN¥17.6m more liquid assets than total liabilities.

Having regard to Triductor Technology (Suzhou)'s size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥3.60b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Triductor Technology (Suzhou) boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Triductor Technology (Suzhou) made a loss at the EBIT level, last year, it was also good to see that it generated CN¥20m in EBIT over the last twelve months. 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 Triductor Technology (Suzhou) 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Triductor Technology (Suzhou) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Triductor Technology (Suzhou) saw substantial negative free cash flow, in total. 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 Triductor Technology (Suzhou) has CN¥300.6m in net cash and a decent-looking balance sheet. So we don't have any problem with Triductor Technology (Suzhou)'s use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Triductor Technology (Suzhou) has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.