Is Tianjin Guoan Mengguli New Materials Science & Technology (SZSE:301487) Using Too Much Debt?

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. We note that Tianjin Guoan Mengguli New Materials Science & Technology Co., Ltd. (SZSE:301487) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Tianjin Guoan Mengguli New Materials Science & Technology's Net Debt?

The image below, which you can click on for greater detail, shows that Tianjin Guoan Mengguli New Materials Science & Technology had debt of CN¥552.6m at the end of September 2024, a reduction from CN¥724.5m over a year. 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. Offsetting this, it had CN¥508.0m in cash and CN¥1.40b in receivables that were due within 12 months. So it can boast CN¥232.4m more liquid assets than total liabilities.

This surplus suggests that Tianjin Guoan Mengguli New Materials Science & Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, Tianjin Guoan Mengguli New Materials Science & Technology has a very light debt load indeed.

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

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

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 one way or the other, it's clear the debt levels are not trivial. Shareholders should be aware that Tianjin Guoan Mengguli New Materials Science & Technology's EBIT was down 95% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 always check how much of that EBIT is translated into 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 free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Tianjin Guoan Mengguli New Materials Science & Technology's EBIT growth rate was a real negative on this analysis, as was its interest cover. But its net debt to EBITDA was significantly redeeming. Looking at all this data makes us feel a little cautious about Tianjin Guoan Mengguli New Materials Science & Technology's debt levels. 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. 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. Case in point: We've spotted 4 warning signs for Tianjin Guoan Mengguli New Materials Science & Technology you should be aware of, and 1 of them is concerning.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.