Tiandi Science & TechnologyLtd (SHSE:600582) Has A Rock Solid Balance Sheet

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.' 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. 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.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tiandi Science & TechnologyLtd

How Much Debt Does Tiandi Science & TechnologyLtd Carry?

As you can see below, at the end of March 2024, Tiandi Science & TechnologyLtd had CN¥921.5m of debt, up from CN¥327.1m a year ago. Click the image for more detail. However, it does have CN¥14.1b in cash offsetting this, leading to net cash of CN¥13.2b.

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

Zooming in on the latest balance sheet data, we can see that Tiandi Science & TechnologyLtd had liabilities of CN¥20.1b due within 12 months and liabilities of CN¥2.47b due beyond that. Offsetting these obligations, it had cash of CN¥14.1b as well as receivables valued at CN¥16.0b due within 12 months. So it actually has CN¥7.52b 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. 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 10% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tiandi Science & TechnologyLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Tiandi Science & TechnologyLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. 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¥13.2b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥3.7b, being 129% of its EBIT. 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 instance, we've identified 1 warning sign for Tiandi Science & TechnologyLtd that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.