Is Tianrun Industry Technology (SZSE:002283) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Tianrun Industry Technology Co., Ltd. (SZSE:002283) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tianrun Industry Technology

How Much Debt Does Tianrun Industry Technology Carry?

The image below, which you can click on for greater detail, shows that Tianrun Industry Technology had debt of CN¥617.1m at the end of September 2023, a reduction from CN¥1.05b over a year. However, its balance sheet shows it holds CN¥1.04b in cash, so it actually has CN¥427.1m net cash.

How Strong 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¥2.32b due within 12 months and liabilities of CN¥172.9m due beyond that. Offsetting this, it had CN¥1.04b in cash and CN¥2.16b in receivables that were due within 12 months. So it can boast CN¥717.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Tianrun Industry Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Tianrun Industry Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Tianrun Industry Technology grew its EBIT by 43% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tianrun Industry Technology 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. 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. During the last three years, Tianrun Industry Technology generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

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¥427.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥165m, being 82% of its EBIT. So is Tianrun Industry Technology'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. Be aware that Tianrun Industry Technology is showing 1 warning sign in our investment analysis , you should know about...

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.