Is Taier Heavy Industry (SZSE:002347) A Risky Investment?

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.' 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 Taier Heavy Industry Co., Ltd. (SZSE:002347) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Taier Heavy Industry

How Much Debt Does Taier Heavy Industry Carry?

You can click the graphic below for the historical numbers, but it shows that Taier Heavy Industry had CN¥96.1m of debt in September 2024, down from CN¥133.7m, one year before. But it also has CN¥321.9m in cash to offset that, meaning it has CN¥225.8m net cash.

How Strong Is Taier Heavy Industry's Balance Sheet?

We can see from the most recent balance sheet that Taier Heavy Industry had liabilities of CN¥1.27b falling due within a year, and liabilities of CN¥44.8m due beyond that. Offsetting these obligations, it had cash of CN¥321.9m as well as receivables valued at CN¥973.0m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Taier Heavy Industry's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥3.90b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Taier Heavy Industry also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Taier Heavy Industry will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Taier Heavy Industry had a loss before interest and tax, and actually shrunk its revenue by 7.1%, to CN¥1.0b. We would much prefer see growth.

So How Risky Is Taier Heavy Industry?

While Taier Heavy Industry lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥9.3m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. To that end, you should be aware of the 2 warning signs we've spotted with Taier Heavy Industry .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.