Tianli Education International Holdings (HKG:1773) Has A Pretty Healthy Balance Sheet
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. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Tianli Education International Holdings Limited (HKG:1773) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Tianli Education International Holdings
How Much Debt Does Tianli Education International Holdings Carry?
The image below, which you can click on for greater detail, shows that Tianli Education International Holdings had debt of CN¥444.1m at the end of June 2019, a reduction from CN¥531.6m over a year. But it also has CN¥1.07b in cash to offset that, meaning it has CN¥626.3m net cash.
How Healthy Is Tianli Education International Holdings's Balance Sheet?
The latest balance sheet data shows that Tianli Education International Holdings had liabilities of CN¥1.44b due within a year, and liabilities of CN¥840.4m falling due after that. Offsetting these obligations, it had cash of CN¥1.07b as well as receivables valued at CN¥6.60m due within 12 months. So it has liabilities totalling CN¥1.20b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Tianli Education International Holdings has a market capitalization of CN¥5.63b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Tianli Education International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
Another good sign is that Tianli Education International Holdings has been able to increase its EBIT by 26% in twelve months, making it easier to pay down 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 Tianli Education International Holdings'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, a company can only pay off debt with cold hard cash, not accounting profits. While Tianli Education International Holdings 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. During the last three years, Tianli Education International Holdings burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing up
While Tianli Education International Holdings does have more liabilities than liquid assets, it also has net cash of CN¥626.3m. And it impressed us with its EBIT growth of 26% over the last year. So we don't have any problem with Tianli Education International Holdings's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Tianli Education International Holdings, you may well want to click here to check an interactive graph of its earnings per share history.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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