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. Importantly, Transwarp Technology (Shanghai) Co.,Ltd. (SHSE:688031) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Transwarp Technology (Shanghai)Ltd's Debt?

You can click the graphic below for the historical numbers, but it shows that Transwarp Technology (Shanghai)Ltd had CN¥38.0m of debt in June 2024, down from CN¥42.5m, one year before. However, it does have CN¥767.3m in cash offsetting this, leading to net cash of CN¥729.3m.

How Strong Is Transwarp Technology (Shanghai)Ltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Transwarp Technology (Shanghai)Ltd had liabilities of CN¥206.9m due within 12 months and liabilities of CN¥58.4m due beyond that. Offsetting these obligations, it had cash of CN¥767.3m as well as receivables valued at CN¥407.4m due within 12 months. So it can boast CN¥909.5m more liquid assets than total liabilities.

It's good to see that Transwarp Technology (Shanghai)Ltd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Transwarp Technology (Shanghai)Ltd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Transwarp Technology (Shanghai)Ltd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Transwarp Technology (Shanghai)Ltd reported revenue of CN¥493m, which is a gain of 19%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Transwarp Technology (Shanghai)Ltd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Transwarp Technology (Shanghai)Ltd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥524m and booked a CN¥290m accounting loss. But at least it has CN¥729.3m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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, we've discovered 2 warning signs for Transwarp Technology (Shanghai)Ltd that you should be aware of before investing here.

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.