Health Check: How Prudently Does China TianYF Holdings Group (HKG:8196) Use Debt?

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 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 China TianYF Holdings Group Limited (HKG:8196) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 TianYF Holdings Group

What Is China TianYF Holdings Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that China TianYF Holdings Group had CN¥45.1m of debt in June 2022, down from CN¥50.0m, one year before. But it also has CN¥57.6m in cash to offset that, meaning it has CN¥12.5m net cash.

How Healthy Is China TianYF Holdings Group's Balance Sheet?

We can see from the most recent balance sheet that China TianYF Holdings Group had liabilities of CN¥317.6m falling due within a year, and liabilities of CN¥4.62m due beyond that. Offsetting these obligations, it had cash of CN¥57.6m as well as receivables valued at CN¥158.9m due within 12 months. So its liabilities total CN¥105.7m more than the combination of its cash and short-term receivables.

China TianYF Holdings Group has a market capitalization of CN¥358.0m, 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. Despite its noteworthy liabilities, China TianYF Holdings Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is China TianYF Holdings Group's earnings that will influence how the balance sheet holds up in the future. 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 TianYF Holdings Group wasn't profitable at an EBIT level, but managed to grow its revenue by 98%, to CN¥154m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is China TianYF Holdings Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year China TianYF Holdings Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥33m and booked a CN¥14m accounting loss. But at least it has CN¥12.5m on the balance sheet to spend on growth, near-term. China TianYF Holdings Group's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Be aware that China TianYF Holdings Group is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...

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.