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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Xi'an Tianhe Defense Technology Co., Ltd. (SZSE:300397) does carry debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Xi'an Tianhe Defense Technology

How Much Debt Does Xi'an Tianhe Defense Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Xi'an Tianhe Defense Technology had debt of CN¥561.9m, up from CN¥532.7m in one year. However, it also had CN¥163.8m in cash, and so its net debt is CN¥398.1m.

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

Zooming in on the latest balance sheet data, we can see that Xi'an Tianhe Defense Technology had liabilities of CN¥608.1m due within 12 months and liabilities of CN¥343.5m due beyond that. Offsetting these obligations, it had cash of CN¥163.8m as well as receivables valued at CN¥165.6m due within 12 months. So its liabilities total CN¥622.3m more than the combination of its cash and short-term receivables.

Given Xi'an Tianhe Defense Technology has a market capitalization of CN¥6.11b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Xi'an Tianhe Defense Technology 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.

Over 12 months, Xi'an Tianhe Defense Technology made a loss at the EBIT level, and saw its revenue drop to CN¥365m, which is a fall of 14%. We would much prefer see growth.

Caveat Emptor

Not only did Xi'an Tianhe Defense Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥177m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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¥180m of cash over the last year. So to be blunt we think it is risky. 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 Xi'an Tianhe Defense Technology .

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.