We Think Tianshui Huatian Technology (SZSE:002185) Has A Fair Chunk Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Tianshui Huatian Technology Co., Ltd. (SZSE:002185) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tianshui Huatian Technology

What Is Tianshui Huatian Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Tianshui Huatian Technology had debt of CN¥12.8b, up from CN¥9.01b in one year. However, because it has a cash reserve of CN¥7.68b, its net debt is less, at about CN¥5.14b.

How Strong Is Tianshui Huatian Technology's Balance Sheet?

According to the last reported balance sheet, Tianshui Huatian Technology had liabilities of CN¥9.71b due within 12 months, and liabilities of CN¥8.60b due beyond 12 months. On the other hand, it had cash of CN¥7.68b and CN¥2.80b worth of receivables due within a year. So it has liabilities totalling CN¥7.83b more than its cash and near-term receivables, combined.

Tianshui Huatian Technology has a market capitalization of CN¥38.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Tianshui Huatian Technology reported revenue of CN¥14b, which is a gain of 27%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Tianshui Huatian Technology's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥153m 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. Another cause for caution is that is bled CN¥2.1b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Tianshui Huatian Technology that you should be aware of.

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.