Is China TianYF Holdings Group (HKG:8196) Weighed On By Its Debt Load?

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. Importantly, China TianYF Holdings Group Limited (HKG:8196) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for China TianYF Holdings Group

What Is China TianYF Holdings Group's Debt?

As you can see below, at the end of June 2022, China TianYF Holdings Group had CN¥45.1m of debt, up from CN¥38.5m a year ago. Click the image for more detail. But it also has CN¥57.6m in cash to offset that, meaning it has CN¥12.5m net cash.

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

According to the last reported balance sheet, China TianYF Holdings Group had liabilities of CN¥317.6m due within 12 months, and liabilities of CN¥4.62m due beyond 12 months. Offsetting this, it had CN¥57.6m in cash and CN¥158.9m in receivables that were due within 12 months. So its liabilities total CN¥105.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since China TianYF Holdings Group has a market capitalization of CN¥279.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China TianYF Holdings Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year China TianYF Holdings Group wasn't profitable at an EBIT level, but managed to grow its revenue by 78%, to CN¥186m. 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¥7.5m accounting loss. However, it has net cash of CN¥12.5m, so it has a bit of time before it will need more capital. 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. 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. To that end, you should learn about the 3 warning signs we've spotted with China TianYF Holdings Group (including 2 which are a bit concerning) .

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.