Is Tianjin Benefo Tejing Electric (SHSE:600468) Using Too Much Debt?

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 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 Tianjin Benefo Tejing Electric Co., Ltd. (SHSE:600468) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Tianjin Benefo Tejing Electric

What Is Tianjin Benefo Tejing Electric's Net Debt?

As you can see below, at the end of June 2024, Tianjin Benefo Tejing Electric had CN¥399.3m of debt, up from CN¥350.2m a year ago. Click the image for more detail. But it also has CN¥781.2m in cash to offset that, meaning it has CN¥381.9m net cash.

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

Zooming in on the latest balance sheet data, we can see that Tianjin Benefo Tejing Electric had liabilities of CN¥1.61b due within 12 months and liabilities of CN¥102.3m due beyond that. Offsetting this, it had CN¥781.2m in cash and CN¥1.36b in receivables that were due within 12 months. So it can boast CN¥435.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Tianjin Benefo Tejing Electric could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Tianjin Benefo Tejing Electric boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Tianjin Benefo Tejing Electric's EBIT dived 19%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But it is Tianjin Benefo Tejing Electric's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, Tianjin Benefo Tejing Electric actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tianjin Benefo Tejing Electric has net cash of CN¥381.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 125% of that EBIT to free cash flow, bringing in CN¥150m. So we are not troubled with Tianjin Benefo Tejing Electric's debt use. 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. For example, we've discovered 1 warning sign for Tianjin Benefo Tejing Electric that you should be aware of before investing here.

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. 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.