Here's Why China Tianrui Automotive Interiors (HKG:6162) Can Afford Some 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies China Tianrui Automotive Interiors Co., LTD (HKG:6162) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for China Tianrui Automotive Interiors

How Much Debt Does China Tianrui Automotive Interiors Carry?

As you can see below, China Tianrui Automotive Interiors had CN¥130.5m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of CN¥106.5m, its net debt is less, at about CN¥24.0m.

How Strong Is China Tianrui Automotive Interiors' Balance Sheet?

The latest balance sheet data shows that China Tianrui Automotive Interiors had liabilities of CN¥255.9m due within a year, and liabilities of CN¥20.6m falling due after that. Offsetting these obligations, it had cash of CN¥106.5m as well as receivables valued at CN¥126.3m due within 12 months. So its liabilities total CN¥43.7m more than the combination of its cash and short-term receivables.

Since publicly traded China Tianrui Automotive Interiors shares are worth a total of CN¥332.9m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Tianrui Automotive Interiors 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 China Tianrui Automotive Interiors had a loss before interest and tax, and actually shrunk its revenue by 40%, to CN¥176m. To be frank that doesn't bode well.

Caveat Emptor

While China Tianrui Automotive Interiors's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥21m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥26m into a profit. In the meantime, we consider the stock very 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. For instance, we've identified 3 warning signs for China Tianrui Automotive Interiors (1 is concerning) 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.