Chongqing Taiji Industry(Group)Ltd (SHSE:600129) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Chongqing Taiji Industry(Group) Co.,Ltd (SHSE:600129) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Chongqing Taiji Industry(Group)Ltd

How Much Debt Does Chongqing Taiji Industry(Group)Ltd Carry?

You can click the graphic below for the historical numbers, but it shows that Chongqing Taiji Industry(Group)Ltd had CN¥4.13b of debt in September 2023, down from CN¥4.50b, one year before. On the flip side, it has CN¥1.19b in cash leading to net debt of about CN¥2.94b.

How Strong Is Chongqing Taiji Industry(Group)Ltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chongqing Taiji Industry(Group)Ltd had liabilities of CN¥9.14b due within 12 months and liabilities of CN¥1.44b due beyond that. On the other hand, it had cash of CN¥1.19b and CN¥3.20b worth of receivables due within a year. So its liabilities total CN¥6.20b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Chongqing Taiji Industry(Group)Ltd is worth CN¥21.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Chongqing Taiji Industry(Group)Ltd's net debt of 2.1 times EBITDA suggests graceful use of debt. And the alluring interest cover (EBIT of 7.2 times interest expense) certainly does not do anything to dispel this impression. Pleasingly, Chongqing Taiji Industry(Group)Ltd is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 8,696% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Chongqing Taiji Industry(Group)Ltd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. During the last two years, Chongqing Taiji Industry(Group)Ltd produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Chongqing Taiji Industry(Group)Ltd's EBIT growth rate suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And its conversion of EBIT to free cash flow is good too. When we consider the range of factors above, it looks like Chongqing Taiji Industry(Group)Ltd is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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. For example, we've discovered 1 warning sign for Chongqing Taiji Industry(Group)Ltd that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.