Is Tian An Australia (ASX:TIA) A Risky Investment?

Warren Buffett famously said, '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 can see that Tian An Australia Limited (ASX:TIA) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Tian An Australia

How Much Debt Does Tian An Australia Carry?

The image below, which you can click on for greater detail, shows that Tian An Australia had debt of AU$78.7m at the end of December 2021, a reduction from AU$84.7m over a year. However, it also had AU$11.0m in cash, and so its net debt is AU$67.7m.

How Healthy Is Tian An Australia's Balance Sheet?

We can see from the most recent balance sheet that Tian An Australia had liabilities of AU$1.12m falling due within a year, and liabilities of AU$78.7m due beyond that. Offsetting this, it had AU$11.0m in cash and AU$17.8m in receivables that were due within 12 months. So it has liabilities totalling AU$51.1m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the AU$21.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Tian An Australia would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Tian An Australia will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

While it hasn't made a profit, at least Tian An Australia booked its first revenue as a publicly listed company, in the last twelve months.

Caveat Emptor

While we can certainly appreciate Tian An Australia's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping AU$2.9m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through AU$6.9m in negative free cash flow over the last year. That means it's on the risky side of things. 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. To that end, you should learn about the 4 warning signs we've spotted with Tian An Australia (including 1 which shouldn't be ignored) .

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.

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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.