Is China Tianrui Automotive Interiors (HKG:6162) A Risky Investment?

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. We can see that China Tianrui Automotive Interiors Co., LTD (HKG:6162) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for China Tianrui Automotive Interiors

What Is China Tianrui Automotive Interiors's Debt?

As you can see below, China Tianrui Automotive Interiors had CN¥110.5m of debt at June 2023, down from CN¥141.4m a year prior. On the flip side, it has CN¥46.8m in cash leading to net debt of about CN¥63.7m.

How Strong Is China Tianrui Automotive Interiors' Balance Sheet?

The latest balance sheet data shows that China Tianrui Automotive Interiors had liabilities of CN¥240.5m due within a year, and liabilities of CN¥20.4m falling due after that. On the other hand, it had cash of CN¥46.8m and CN¥167.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥46.3m.

China Tianrui Automotive Interiors has a market capitalization of CN¥221.6m, 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. 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 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to CN¥214m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate China Tianrui Automotive Interiors's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost CN¥12m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥18m. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with China Tianrui Automotive Interiors (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

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.

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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.