We Think Tianjin Benefo Tejing Electric (SHSE:600468) Can Manage Its Debt With Ease

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 Benefo Tejing Electric Co., Ltd. (SHSE:600468) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View our latest analysis for Tianjin Benefo Tejing Electric

What Is Tianjin Benefo Tejing Electric's Debt?

As you can see below, Tianjin Benefo Tejing Electric had CN¥277.8m of debt at September 2023, down from CN¥372.7m a year prior. However, its balance sheet shows it holds CN¥567.9m in cash, so it actually has CN¥290.1m net cash.

A Look At Tianjin Benefo Tejing Electric's Liabilities

According to the last reported balance sheet, Tianjin Benefo Tejing Electric had liabilities of CN¥1.52b due within 12 months, and liabilities of CN¥80.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥567.9m as well as receivables valued at CN¥1.39b due within 12 months. So it actually has CN¥364.8m 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!

While Tianjin Benefo Tejing Electric doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tianjin Benefo Tejing Electric'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. 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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¥290.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 101% of that EBIT to free cash flow, bringing in CN¥100m. So we don't think Tianjin Benefo Tejing Electric's use of debt is risky. 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 1 warning sign for Tianjin Benefo Tejing Electric that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.