Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk'. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Tianjin TEDA Biomedical Engineering Company Limited (HKG:8189) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Tianjin TEDA Biomedical Engineering's Debt?
As you can see below, at the end of June 2019, Tianjin TEDA Biomedical Engineering had CN¥48.2m of debt, up from CN¥78.6 a year ago. Click the image for more detail. But on the other hand it also has CN¥69.6m in cash, leading to a CN¥21.4m net cash position.
How Healthy Is Tianjin TEDA Biomedical Engineering's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Tianjin TEDA Biomedical Engineering had liabilities of CN¥175.4m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of CN¥69.6m as well as receivables valued at CN¥150.4m due within 12 months. So it actually has CN¥44.5m more liquid assets than total liabilities.
This surplus suggests that Tianjin TEDA Biomedical Engineering is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Tianjin TEDA Biomedical Engineering boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Tianjin TEDA Biomedical Engineering's earnings that will influence how the balance sheet holds up in the future. 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.
In the last year Tianjin TEDA Biomedical Engineering had negative earnings before interest and tax, and actually shrunk its revenue by 7.3%, to CN¥367m. We would much prefer see growth.
So How Risky Is Tianjin TEDA Biomedical Engineering?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Tianjin TEDA Biomedical Engineering lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥19m of cash and made a loss of CN¥133m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥21.4m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 5 warning signs for Tianjin TEDA Biomedical Engineering (of which 1 can't be ignored!) you should know about.
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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