Xi'an Tianhe Defense Technology (SZSE:300397) Is Carrying A Fair Bit 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. We can see that Xi'an Tianhe Defense Technology Co., Ltd. (SZSE:300397) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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¥412.9m at the end of March 2024, a reduction from CN¥434.2m over a year. However, it does have CN¥247.2m in cash offsetting this, leading to net debt of about CN¥165.7m.

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

We can see from the most recent balance sheet that Xi'an Tianhe Defense Technology had liabilities of CN¥494.1m falling due within a year, and liabilities of CN¥388.0m due beyond that. Offsetting this, it had CN¥247.2m in cash and CN¥176.2m in receivables that were due within 12 months. So it has liabilities totalling CN¥458.7m more than its cash and near-term receivables, combined.

Of course, Xi'an Tianhe Defense Technology has a market capitalization of CN¥5.63b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Xi'an Tianhe Defense Technology had a loss before interest and tax, and actually shrunk its revenue by 17%, to CN¥405m. That's not what we would hope to see.

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¥143m 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. Another cause for caution is that is bled CN¥283m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Xi'an Tianhe Defense Technology is showing 3 warning signs in our investment analysis , you should know about...

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.