Is Tian An Australia (ASX:TIA) Using Too Much Debt?

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 Tian An Australia Limited (ASX:TIA) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

See 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 Tian An Australia had AU$61.2m of debt in June 2022, down from AU$88.2m, one year before. However, it also had AU$21.2m in cash, and so its net debt is AU$40.0m.

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$1.31m falling due within a year, and liabilities of AU$61.2m due beyond that. On the other hand, it had cash of AU$21.2m and AU$3.23m worth of receivables due within a year. So it has liabilities totalling AU$38.1m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the AU$19.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Tian An Australia would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Tian An Australia's earnings that will influence how the balance sheet holds up in the future. 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

Despite the top line growth, Tian An Australia still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$19m at the EBIT level. 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 had negative free cash flow of AU$9.1m over the last twelve months. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Tian An Australia (2 shouldn't be ignored!) that you should be aware of before investing here.

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.

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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.