Does TianJin 712 Communication & Broadcasting (SHSE:603712) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, TianJin 712 Communication & Broadcasting Co., Ltd. (SHSE:603712) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for TianJin 712 Communication & Broadcasting

What Is TianJin 712 Communication & Broadcasting's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 TianJin 712 Communication & Broadcasting had debt of CN¥1.21b, up from CN¥916.6m in one year. On the flip side, it has CN¥1.10b in cash leading to net debt of about CN¥110.4m.

How Healthy Is TianJin 712 Communication & Broadcasting's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TianJin 712 Communication & Broadcasting had liabilities of CN¥3.53b due within 12 months and liabilities of CN¥955.0m due beyond that. On the other hand, it had cash of CN¥1.10b and CN¥4.16b worth of receivables due within a year. So it actually has CN¥774.7m more liquid assets than total liabilities.

This surplus suggests that TianJin 712 Communication & Broadcasting has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, TianJin 712 Communication & Broadcasting has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

TianJin 712 Communication & Broadcasting has net debt of just 0.39 times EBITDA, suggesting it could ramp leverage without breaking a sweat. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So it's fair to say it can handle debt like a hotshot teppanyaki chef handles cooking. It is just as well that TianJin 712 Communication & Broadcasting's load is not too heavy, because its EBIT was down 72% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if TianJin 712 Communication & Broadcasting can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, TianJin 712 Communication & Broadcasting burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

We feel some trepidation about TianJin 712 Communication & Broadcasting's difficulty EBIT growth rate, but we've got positives to focus on, too. For example, its interest cover and net debt to EBITDA give us some confidence in its ability to manage its debt. Looking at all the angles mentioned above, it does seem to us that TianJin 712 Communication & Broadcasting is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. 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. To that end, you should be aware of the 2 warning signs we've spotted with TianJin 712 Communication & Broadcasting .

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.