Is Tibet Tianlu (SHSE:600326) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Tibet Tianlu Co., Ltd. (SHSE:600326) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Tibet Tianlu

What Is Tibet Tianlu's Debt?

You can click the graphic below for the historical numbers, but it shows that Tibet Tianlu had CN¥4.79b of debt in March 2024, down from CN¥5.14b, one year before. However, it does have CN¥2.70b in cash offsetting this, leading to net debt of about CN¥2.09b.

A Look At Tibet Tianlu's Liabilities

The latest balance sheet data shows that Tibet Tianlu had liabilities of CN¥4.82b due within a year, and liabilities of CN¥2.85b falling due after that. On the other hand, it had cash of CN¥2.70b and CN¥3.69b worth of receivables due within a year. So it has liabilities totalling CN¥1.28b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Tibet Tianlu has a market capitalization of CN¥5.90b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Tibet Tianlu's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Tibet Tianlu reported revenue of CN¥3.9b, which is a gain of 4.8%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Tibet Tianlu had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥249m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥24m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Tibet Tianlu is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.

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