We Think China TianYF Holdings Group (HKG:8196) Can Stay On Top Of Its 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.' 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 China TianYF Holdings Group Limited (HKG:8196) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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¥25.2m of debt in December 2022, down from CN¥38.8m, one year before. However, its balance sheet shows it holds CN¥55.3m in cash, so it actually has CN¥30.1m net cash.

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

The latest balance sheet data shows that China TianYF Holdings Group had liabilities of CN¥254.4m due within a year, and liabilities of CN¥5.84m falling due after that. On the other hand, it had cash of CN¥55.3m and CN¥161.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥43.4m.

Since publicly traded China TianYF Holdings Group shares are worth a total of CN¥328.6m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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!

Notably, China TianYF Holdings Group made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥1.9m in the last twelve months. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. China TianYF Holdings Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, China TianYF Holdings Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although China TianYF Holdings Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥30.1m. The cherry on top was that in converted 1,328% of that EBIT to free cash flow, bringing in CN¥25m. So we don't have any problem with China TianYF Holdings Group's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for China TianYF Holdings Group you should be aware of, and 1 of them can't be ignored.

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.