These 4 Measures Indicate That Tianjin Ringpu Bio-TechnologyLtd (SZSE:300119) Is Using Debt Reasonably Well

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Tianjin Ringpu Bio-Technology Co.,Ltd. (SZSE:300119) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tianjin Ringpu Bio-TechnologyLtd

How Much Debt Does Tianjin Ringpu Bio-TechnologyLtd Carry?

As you can see below, at the end of June 2024, Tianjin Ringpu Bio-TechnologyLtd had CN¥1.14b of debt, up from CN¥772.9m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.52b in cash, leading to a CN¥379.8m net cash position.

A Look At Tianjin Ringpu Bio-TechnologyLtd's Liabilities

We can see from the most recent balance sheet that Tianjin Ringpu Bio-TechnologyLtd had liabilities of CN¥1.70b falling due within a year, and liabilities of CN¥609.2m due beyond that. Offsetting this, it had CN¥1.52b in cash and CN¥1.10b in receivables that were due within 12 months. So it actually has CN¥311.3m more liquid assets than total liabilities.

This surplus suggests that Tianjin Ringpu Bio-TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tianjin Ringpu Bio-TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Tianjin Ringpu Bio-TechnologyLtd saw its EBIT decline by 4.2% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Tianjin Ringpu Bio-TechnologyLtd can strengthen its balance sheet over time. 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 company can only pay off debt with cold hard cash, not accounting profits. While Tianjin Ringpu Bio-TechnologyLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Tianjin Ringpu Bio-TechnologyLtd recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tianjin Ringpu Bio-TechnologyLtd has CN¥379.8m in net cash and a decent-looking balance sheet. So we are not troubled with Tianjin Ringpu Bio-TechnologyLtd's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with Tianjin Ringpu Bio-TechnologyLtd .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.