Here's Why Tibet Urban Development and InvestmentLTD (SHSE:600773) Is Weighed Down By Its Debt Load

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Tibet Urban Development and Investment Co.,LTD (SHSE:600773) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tibet Urban Development and InvestmentLTD

What Is Tibet Urban Development and InvestmentLTD's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tibet Urban Development and InvestmentLTD had CN¥3.67b of debt in September 2024, down from CN¥4.05b, one year before. On the flip side, it has CN¥914.5m in cash leading to net debt of about CN¥2.76b.

A Look At Tibet Urban Development and InvestmentLTD's Liabilities

The latest balance sheet data shows that Tibet Urban Development and InvestmentLTD had liabilities of CN¥6.37b due within a year, and liabilities of CN¥3.74b falling due after that. Offsetting these obligations, it had cash of CN¥914.5m as well as receivables valued at CN¥85.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥9.11b.

This deficit is considerable relative to its market capitalization of CN¥10.2b, so it does suggest shareholders should keep an eye on Tibet Urban Development and InvestmentLTD's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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.

Weak interest cover of 0.024 times and a disturbingly high net debt to EBITDA ratio of 27.1 hit our confidence in Tibet Urban Development and InvestmentLTD like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Worse, Tibet Urban Development and InvestmentLTD's EBIT was down 99% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tibet Urban Development and InvestmentLTD'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Tibet Urban Development and InvestmentLTD burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both Tibet Urban Development and InvestmentLTD's conversion of EBIT to free cash flow and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. And even its net debt to EBITDA fails to inspire much confidence. After considering the datapoints discussed, we think Tibet Urban Development and InvestmentLTD has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. 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. For example Tibet Urban Development and InvestmentLTD has 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

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.

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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.