Is Tsinghua Tongfang (SHSE:600100) Using Too Much Debt?

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 can see that Tsinghua Tongfang Co., Ltd. (SHSE:600100) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Tsinghua Tongfang

What Is Tsinghua Tongfang's Debt?

You can click the graphic below for the historical numbers, but it shows that Tsinghua Tongfang had CN¥16.2b of debt in March 2024, down from CN¥20.3b, one year before. However, it also had CN¥6.52b in cash, and so its net debt is CN¥9.70b.

How Healthy Is Tsinghua Tongfang's Balance Sheet?

According to the last reported balance sheet, Tsinghua Tongfang had liabilities of CN¥19.3b due within 12 months, and liabilities of CN¥11.5b due beyond 12 months. Offsetting these obligations, it had cash of CN¥6.52b as well as receivables valued at CN¥9.79b due within 12 months. So it has liabilities totalling CN¥14.5b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥17.8b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Tsinghua Tongfang will need earnings to service that debt. 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.

In the last year Tsinghua Tongfang wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to CN¥27b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Tsinghua Tongfang had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥18m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥149m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Tsinghua Tongfang .

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.