Tianjin Ringpu Bio-TechnologyLtd (SZSE:300119) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Tianjin Ringpu Bio-Technology Co.,Ltd. (SZSE:300119) 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?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tianjin Ringpu Bio-TechnologyLtd

What Is Tianjin Ringpu Bio-TechnologyLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Tianjin Ringpu Bio-TechnologyLtd had CN¥905.1m of debt, an increase on CN¥697.6m, over one year. However, it does have CN¥1.86b in cash offsetting this, leading to net cash of CN¥954.7m.

How Strong Is Tianjin Ringpu Bio-TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tianjin Ringpu Bio-TechnologyLtd had liabilities of CN¥1.23b due within 12 months and liabilities of CN¥548.7m due beyond that. On the other hand, it had cash of CN¥1.86b and CN¥1.02b worth of receivables due within a year. So it can boast CN¥1.10b more liquid assets than total liabilities.

It's good to see that Tianjin Ringpu Bio-TechnologyLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Tianjin Ringpu Bio-TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Tianjin Ringpu Bio-TechnologyLtd grew its EBIT by 4.1% in the last year, making that debt load look even more manageable. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. In the last three years, Tianjin Ringpu Bio-TechnologyLtd's free cash flow amounted to 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Tianjin Ringpu Bio-TechnologyLtd has net cash of CN¥954.7m, as well as more liquid assets than liabilities. And it also grew its EBIT by 4.1% over the last year. So we are not troubled with Tianjin Ringpu Bio-TechnologyLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Tianjin Ringpu Bio-TechnologyLtd is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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