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.' 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. As with many other companies Triangle Tyre Co.,Ltd (SHSE:601163) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Triangle TyreLtd's Net Debt?
The image below, which you can click on for greater detail, shows that Triangle TyreLtd had debt of CN¥845.2m at the end of March 2024, a reduction from CN¥1.50b over a year. But on the other hand it also has CN¥2.04b in cash, leading to a CN¥1.20b net cash position.
A Look At Triangle TyreLtd's Liabilities
We can see from the most recent balance sheet that Triangle TyreLtd had liabilities of CN¥5.20b falling due within a year, and liabilities of CN¥410.2m due beyond that. On the other hand, it had cash of CN¥2.04b and CN¥2.00b worth of receivables due within a year. So its liabilities total CN¥1.56b more than the combination of its cash and short-term receivables.
Given Triangle TyreLtd has a market capitalization of CN¥14.2b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Triangle TyreLtd boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Triangle TyreLtd grew its EBIT by 86% over the last twelve months, and that growth will make it easier to handle its debt. 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 Triangle TyreLtd'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. While Triangle TyreLtd 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 three years, Triangle TyreLtd actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
While Triangle TyreLtd does have more liabilities than liquid assets, it also has net cash of CN¥1.20b. The cherry on top was that in converted 137% of that EBIT to free cash flow, bringing in CN¥1.6b. So we don't think Triangle TyreLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Triangle TyreLtd has 1 warning sign we think you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.