Is Xinjiang Tianye Water Saving Irrigation System (HKG:840) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Xinjiang Tianye Water Saving Irrigation System Company Limited (HKG:840) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Xinjiang Tianye Water Saving Irrigation System

What Is Xinjiang Tianye Water Saving Irrigation System's Net Debt?

As you can see below, Xinjiang Tianye Water Saving Irrigation System had CN¥33.6m of debt at June 2021, down from CN¥80.0m a year prior. However, it does have CN¥56.1m in cash offsetting this, leading to net cash of CN¥22.5m.

How Healthy Is Xinjiang Tianye Water Saving Irrigation System's Balance Sheet?

We can see from the most recent balance sheet that Xinjiang Tianye Water Saving Irrigation System had liabilities of CN¥356.7m falling due within a year, and liabilities of CN¥6.73m due beyond that. On the other hand, it had cash of CN¥56.1m and CN¥244.2m worth of receivables due within a year. So its liabilities total CN¥63.1m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Xinjiang Tianye Water Saving Irrigation System has a market capitalization of CN¥114.3m, 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. While it does have liabilities worth noting, Xinjiang Tianye Water Saving Irrigation System also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Xinjiang Tianye Water Saving Irrigation System 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.

Over 12 months, Xinjiang Tianye Water Saving Irrigation System reported revenue of CN¥738m, which is a gain of 7.6%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Xinjiang Tianye Water Saving Irrigation System?

While Xinjiang Tianye Water Saving Irrigation System lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥185k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 example, we've discovered 2 warning signs for Xinjiang Tianye Water Saving Irrigation System that you should be aware of before investing here.

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.

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.

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