We Think Beijing Tiantan Biological Products (SHSE:600161) Can Stay On Top Of Its Debt

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. As with many other companies Beijing Tiantan Biological Products Co., Ltd. (SHSE:600161) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Beijing Tiantan Biological Products

How Much Debt Does Beijing Tiantan Biological Products Carry?

You can click the graphic below for the historical numbers, but it shows that Beijing Tiantan Biological Products had CN¥220.8m of debt in September 2023, down from CN¥366.7m, one year before. But it also has CN¥5.06b in cash to offset that, meaning it has CN¥4.84b net cash.

How Healthy Is Beijing Tiantan Biological Products' Balance Sheet?

The latest balance sheet data shows that Beijing Tiantan Biological Products had liabilities of CN¥1.87b due within a year, and liabilities of CN¥249.4m falling due after that. Offsetting these obligations, it had cash of CN¥5.06b as well as receivables valued at CN¥524.8m due within 12 months. So it can boast CN¥3.47b more liquid assets than total liabilities.

This surplus suggests that Beijing Tiantan Biological Products has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Beijing Tiantan Biological Products has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Beijing Tiantan Biological Products grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Beijing Tiantan Biological Products's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Beijing Tiantan Biological Products may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Beijing Tiantan Biological Products's free cash flow amounted to 20% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Tiantan Biological Products has CN¥4.84b in net cash and a decent-looking balance sheet. And we liked the look of last year's 40% year-on-year EBIT growth. So we don't think Beijing Tiantan Biological Products's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Beijing Tiantan Biological Products's earnings per share history for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.