Tianjin Pengling GroupLtd (SZSE:300375) Has A Pretty Healthy Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Tianjin Pengling Group Co.,Ltd (SZSE:300375) does use debt in its business. But the real question is whether this debt is making the company risky.

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tianjin Pengling GroupLtd

What Is Tianjin Pengling GroupLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Tianjin Pengling GroupLtd had CN¥199.4m of debt, an increase on CN¥3.27m, over one year. However, it does have CN¥552.3m in cash offsetting this, leading to net cash of CN¥352.9m.

How Healthy Is Tianjin Pengling GroupLtd's Balance Sheet?

We can see from the most recent balance sheet that Tianjin Pengling GroupLtd had liabilities of CN¥799.2m falling due within a year, and liabilities of CN¥105.0m due beyond that. Offsetting these obligations, it had cash of CN¥552.3m as well as receivables valued at CN¥719.5m due within 12 months. So it actually has CN¥367.6m more liquid assets than total liabilities.

This surplus suggests that Tianjin Pengling GroupLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tianjin Pengling GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Tianjin Pengling GroupLtd's saving grace is its low debt levels, because its EBIT has tanked 45% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is Tianjin Pengling GroupLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Tianjin Pengling GroupLtd 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, Tianjin Pengling GroupLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tianjin Pengling GroupLtd has net cash of CN¥352.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 113% of that EBIT to free cash flow, bringing in -CN¥150m. So we are not troubled with Tianjin Pengling GroupLtd's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Tianjin Pengling GroupLtd (1 can't be ignored!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.