Is Tianshui Huatian Technology (SZSE:002185) Using Too Much 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. Importantly, Tianshui Huatian Technology Co., Ltd. (SZSE:002185) does carry debt. But the real question is whether this debt is making the company risky.

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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tianshui Huatian Technology

What Is Tianshui Huatian Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Tianshui Huatian Technology had CN¥12.0b of debt, an increase on CN¥7.66b, over one year. However, it also had CN¥8.14b in cash, and so its net debt is CN¥3.86b.

A Look At Tianshui Huatian Technology's Liabilities

We can see from the most recent balance sheet that Tianshui Huatian Technology had liabilities of CN¥11.1b falling due within a year, and liabilities of CN¥5.75b due beyond that. Offsetting these obligations, it had cash of CN¥8.14b as well as receivables valued at CN¥2.29b due within 12 months. So it has liabilities totalling CN¥6.37b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Tianshui Huatian Technology is worth CN¥25.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Tianshui Huatian Technology'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.

Over 12 months, Tianshui Huatian Technology reported revenue of CN¥12b, which is a gain of 9.2%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Tianshui Huatian Technology produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥221m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥1.2b of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. Case in point: We've spotted 1 warning sign for Tianshui Huatian Technology you should be aware of.

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.

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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.