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. Importantly, Tianli Holdings Group Limited (HKG:117) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Tianli Holdings Group Carry?
The chart below, which you can click on for greater detail, shows that Tianli Holdings Group had CN¥404.5m in debt in June 2019; about the same as the year before. On the flip side, it has CN¥397.3m in cash leading to net debt of about CN¥7.29m.
A Look At Tianli Holdings Group's Liabilities
According to the last reported balance sheet, Tianli Holdings Group had liabilities of CN¥558.0m due within 12 months, and liabilities of CN¥88.2m due beyond 12 months. On the other hand, it had cash of CN¥397.3m and CN¥152.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥96.0m.
Tianli Holdings Group has a market capitalization of CN¥324.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Tianli Holdings Group'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.
In the last year Tianli Holdings Group had negative earnings before interest and tax, and actually shrunk its revenue by 60%, to CN¥661m. That makes us nervous, to say the least.
While Tianli Holdings Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥97m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥79m into a profit. So in short it's a really risky stock. For riskier companies like Tianli Holdings Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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