Is Tingyi (Cayman Islands) Holding (HKG:322) A Risky Investment?
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. 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 can see that Tingyi (Cayman Islands) Holding Corp. (HKG:322) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Tingyi (Cayman Islands) Holding
What Is Tingyi (Cayman Islands) Holding's Net Debt?
As you can see below, Tingyi (Cayman Islands) Holding had CN¥9.89b of debt at June 2019, down from CN¥11.0b a year prior. But on the other hand it also has CN¥16.0b in cash, leading to a CN¥6.10b net cash position.
How Strong Is Tingyi (Cayman Islands) Holding's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Tingyi (Cayman Islands) Holding had liabilities of CN¥27.7b due within 12 months and liabilities of CN¥5.09b due beyond that. Offsetting these obligations, it had cash of CN¥16.0b as well as receivables valued at CN¥2.09b due within 12 months. So its liabilities total CN¥14.7b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Tingyi (Cayman Islands) Holding is worth CN¥63.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Tingyi (Cayman Islands) Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.
The good news is that Tingyi (Cayman Islands) Holding has increased its EBIT by 5.5% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tingyi (Cayman Islands) Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Tingyi (Cayman Islands) Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Tingyi (Cayman Islands) Holding 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
Although Tingyi (Cayman Islands) Holding's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥6.10b. The cherry on top was that in converted 166% of that EBIT to free cash flow, bringing in CN¥4.6b. So is Tingyi (Cayman Islands) Holding's debt a risk? It doesn't seem so to us. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Tingyi (Cayman Islands) Holding insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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