Is Tian An Australia (ASX:TIA) Using Debt In A Risky Way?

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. Importantly, Tian An Australia Limited (ASX:TIA) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tian An Australia

How Much Debt Does Tian An Australia Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Tian An Australia had AU$84.7m of debt, an increase on AU$23.0m, over one year. However, it also had AU$35.3m in cash, and so its net debt is AU$49.4m.

How Strong Is Tian An Australia's Balance Sheet?

We can see from the most recent balance sheet that Tian An Australia had liabilities of AU$704.0k falling due within a year, and liabilities of AU$84.7m due beyond that. Offsetting these obligations, it had cash of AU$35.3m as well as receivables valued at AU$164.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$50.0m.

The deficiency here weighs heavily on the AU$31.6m 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'd watch its balance sheet closely, without a doubt. After all, Tian An Australia would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tian An Australia will need earnings to service that debt. 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.

It seems likely shareholders hope that Tian An Australia can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

While Tian An Australia's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at AU$2.5m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through AU$7.6m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Tian An Australia you should be aware of, and 3 of them can't be ignored.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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. 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.
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