Does Tianjin Guoan Mengguli New Materials Science & Technology (SZSE:301487) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Tianjin Guoan Mengguli New Materials Science & Technology Co., Ltd. (SZSE:301487) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Tianjin Guoan Mengguli New Materials Science & Technology

How Much Debt Does Tianjin Guoan Mengguli New Materials Science & Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Tianjin Guoan Mengguli New Materials Science & Technology had CN¥552.6m of debt in September 2024, down from CN¥724.5m, one year before. However, it also had CN¥508.0m in cash, and so its net debt is CN¥44.5m.

How Healthy Is Tianjin Guoan Mengguli New Materials Science & Technology's Balance Sheet?

We can see from the most recent balance sheet that Tianjin Guoan Mengguli New Materials Science & Technology had liabilities of CN¥1.57b falling due within a year, and liabilities of CN¥110.2m due beyond that. On the other hand, it had cash of CN¥508.0m and CN¥1.40b worth of receivables due within a year. So it can boast CN¥232.4m more liquid assets than total liabilities.

Having regard to Tianjin Guoan Mengguli New Materials Science & Technology'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¥13.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, Tianjin Guoan Mengguli New Materials Science & Technology has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Tianjin Guoan Mengguli New Materials Science & Technology has a very low debt to EBITDA ratio of 0.40 so it is strange to see weak interest coverage, with last year's EBIT being only 0.15 times the interest expense. So while we're not necessarily alarmed we think that its debt is far from trivial. Shareholders should be aware that Tianjin Guoan Mengguli New Materials Science & Technology's EBIT was down 95% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tianjin Guoan Mengguli New Materials Science & Technology's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, Tianjin Guoan Mengguli New Materials Science & Technology recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

We weren't impressed with Tianjin Guoan Mengguli New Materials Science & Technology's interest cover, and its EBIT growth rate made us cautious. But its net debt to EBITDA was significantly redeeming. When we consider all the factors mentioned above, we do feel a bit cautious about Tianjin Guoan Mengguli New Materials Science & Technology's use of debt. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Tianjin Guoan Mengguli New Materials Science & Technology (of which 2 are a bit unpleasant!) you should know about.

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.