Does Tiandi Science & TechnologyLtd (SHSE:600582) Have A 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Tiandi Science & Technology Co.Ltd (SHSE:600582) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Tiandi Science & TechnologyLtd

What Is Tiandi Science & TechnologyLtd's Net Debt?

As you can see below, at the end of September 2024, Tiandi Science & TechnologyLtd had CN¥561.1m of debt, up from CN¥285.2m a year ago. Click the image for more detail. But on the other hand it also has CN¥11.7b in cash, leading to a CN¥11.1b net cash position.

A Look At Tiandi Science & TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Tiandi Science & TechnologyLtd had liabilities of CN¥20.7b due within 12 months and liabilities of CN¥2.50b due beyond that. Offsetting this, it had CN¥11.7b in cash and CN¥17.7b in receivables that were due within 12 months. So it actually has CN¥6.21b more liquid assets than total liabilities.

This surplus suggests that Tiandi Science & TechnologyLtd is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Tiandi Science & TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Tiandi Science & TechnologyLtd grew its EBIT by 5.5% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tiandi Science & TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Tiandi Science & TechnologyLtd 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, Tiandi Science & TechnologyLtd 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 Tiandi Science & TechnologyLtd has CN¥11.1b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 104% of that EBIT to free cash flow, bringing in CN¥1.8b. So we don't think Tiandi Science & TechnologyLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Tiandi Science & TechnologyLtd has 1 warning sign we think you should be aware of.

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.

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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.