TianJin 712 Communication & Broadcasting (SHSE:603712) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies TianJin 712 Communication & Broadcasting Co., Ltd. (SHSE:603712) makes use of 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for TianJin 712 Communication & Broadcasting

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

You can click the graphic below for the historical numbers, but it shows that as of September 2023 TianJin 712 Communication & Broadcasting had CN¥763.2m of debt, an increase on CN¥716.0m, over one year. However, it does have CN¥561.6m in cash offsetting this, leading to net debt of about CN¥201.6m.

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¥4.49b due within 12 months and liabilities of CN¥598.9m due beyond that. Offsetting this, it had CN¥561.6m in cash and CN¥4.56b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to TianJin 712 Communication & Broadcasting's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥20.6b company is short on cash, but still worth keeping an eye on the balance sheet. 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 a low net debt to EBITDA ratio of only 0.23. And its EBIT covers its interest expense a whopping 143 times over. So we're pretty relaxed about its super-conservative use of debt. Also good is that TianJin 712 Communication & Broadcasting grew its EBIT at 14% over the last year, further increasing its ability to manage debt. 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 TianJin 712 Communication & Broadcasting'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last three years, TianJin 712 Communication & Broadcasting created free cash flow amounting to 6.1% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

Happily, TianJin 712 Communication & Broadcasting's impressive interest cover implies it has the upper hand on its debt. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. All these things considered, it appears that TianJin 712 Communication & Broadcasting can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of TianJin 712 Communication & Broadcasting's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.