Does Tianrun Industry Technology (SZSE:002283) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Tianrun Industry Technology Co., Ltd. (SZSE:002283) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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 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 Tianrun Industry Technology

What Is Tianrun Industry Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Tianrun Industry Technology had debt of CN¥848.0m, up from CN¥617.1m in one year. But it also has CN¥1.60b in cash to offset that, meaning it has CN¥755.2m net cash.

How Healthy Is Tianrun Industry Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tianrun Industry Technology had liabilities of CN¥2.37b due within 12 months and liabilities of CN¥156.3m due beyond that. Offsetting this, it had CN¥1.60b in cash and CN¥2.01b in receivables that were due within 12 months. So it can boast CN¥1.08b more liquid assets than total liabilities.

This excess liquidity suggests that Tianrun Industry Technology is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Tianrun Industry Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Tianrun Industry Technology saw its EBIT decline by 6.9% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tianrun Industry Technology'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. Tianrun Industry Technology 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, Tianrun Industry Technology 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 Tianrun Industry Technology has net cash of CN¥755.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 142% of that EBIT to free cash flow, bringing in CN¥707m. So we don't think Tianrun Industry Technology's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Tianrun Industry Technology that you should be aware of before investing here.

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.