Is Tiandi Science & TechnologyLtd (SHSE:600582) Using Too Much Debt?

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. Importantly, Tiandi Science & Technology Co.Ltd (SHSE:600582) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tiandi Science & TechnologyLtd

How Much Debt Does Tiandi Science & TechnologyLtd Carry?

As you can see below, at the end of September 2023, Tiandi Science & TechnologyLtd had CN¥484.6m of debt, up from CN¥295.6m a year ago. Click the image for more detail. But it also has CN¥12.7b in cash to offset that, meaning it has CN¥12.2b net cash.

How Healthy Is Tiandi Science & TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Tiandi Science & TechnologyLtd had liabilities of CN¥20.3b due within a year, and liabilities of CN¥2.32b falling due after that. On the other hand, it had cash of CN¥12.7b and CN¥17.4b worth of receivables due within a year. So it actually has CN¥7.42b more liquid assets than total liabilities.

It's good to see that Tiandi Science & TechnologyLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Tiandi Science & TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Tiandi Science & TechnologyLtd grew its EBIT at 17% over the last year, further increasing its ability to manage debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. 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 Tiandi Science & TechnologyLtd has net cash of CN¥12.2b, as well as more liquid assets than liabilities. The cherry on top was that in converted 119% of that EBIT to free cash flow, bringing in CN¥3.2b. So is Tiandi Science & TechnologyLtd's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Tiandi Science & TechnologyLtd you should be aware of.

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.

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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.