Is Tianjin Benefo Tejing Electric (SHSE:600468) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Tianjin Benefo Tejing Electric Co., Ltd. (SHSE:600468) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Tianjin Benefo Tejing Electric Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Tianjin Benefo Tejing Electric had debt of CN¥301.9m, up from CN¥277.8m in one year. However, its balance sheet shows it holds CN¥672.5m in cash, so it actually has CN¥370.6m net cash.

How Strong Is Tianjin Benefo Tejing Electric's Balance Sheet?

The latest balance sheet data shows that Tianjin Benefo Tejing Electric had liabilities of CN¥1.53b due within a year, and liabilities of CN¥83.6m falling due after that. On the other hand, it had cash of CN¥672.5m and CN¥1.35b worth of receivables due within a year. So it actually has CN¥410.0m more liquid assets than total liabilities.

This surplus suggests that Tianjin Benefo Tejing Electric has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Tianjin Benefo Tejing Electric has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Tianjin Benefo Tejing Electric

On the other hand, Tianjin Benefo Tejing Electric saw its EBIT drop by 9.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tianjin Benefo Tejing Electric 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Tianjin Benefo Tejing Electric has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Tianjin Benefo Tejing Electric 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 it is always sensible to investigate a company's debt, in this case Tianjin Benefo Tejing Electric has CN¥370.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥166m, being 110% of its EBIT. So is Tianjin Benefo Tejing Electric's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Tianjin Benefo Tejing Electric that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.