We Think Xi'an Tianhe Defense Technology (SZSE:300397) Has A Fair Chunk Of Debt

Warren Buffett famously said, '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. As with many other companies Xi'an Tianhe Defense Technology Co., Ltd. (SZSE:300397) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Xi'an Tianhe Defense Technology

What Is Xi'an Tianhe Defense Technology's Net Debt?

The image below, which you can click on for greater detail, shows that Xi'an Tianhe Defense Technology had debt of CN¥471.5m at the end of June 2024, a reduction from CN¥518.6m over a year. However, it also had CN¥199.4m in cash, and so its net debt is CN¥272.1m.

How Strong Is Xi'an Tianhe Defense Technology's Balance Sheet?

According to the last reported balance sheet, Xi'an Tianhe Defense Technology had liabilities of CN¥544.4m due within 12 months, and liabilities of CN¥346.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥199.4m as well as receivables valued at CN¥183.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥508.8m.

Of course, Xi'an Tianhe Defense Technology has a market capitalization of CN¥5.25b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Xi'an Tianhe Defense Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Xi'an Tianhe Defense Technology made a loss at the EBIT level, and saw its revenue drop to CN¥362m, which is a fall of 21%. That makes us nervous, to say the least.

Caveat Emptor

While Xi'an Tianhe Defense Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥176m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥186m of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Xi'an Tianhe Defense Technology , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.