Xinjiang Tianye Water Saving Irrigation System (HKG:840) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Xinjiang Tianye Water Saving Irrigation System Company Limited (HKG:840) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Xinjiang Tianye Water Saving Irrigation System

How Much Debt Does Xinjiang Tianye Water Saving Irrigation System Carry?

As you can see below, at the end of December 2022, Xinjiang Tianye Water Saving Irrigation System had CN¥130.3m of debt, up from CN¥43.8m a year ago. Click the image for more detail. But on the other hand it also has CN¥238.7m in cash, leading to a CN¥108.4m net cash position.

A Look At Xinjiang Tianye Water Saving Irrigation System's Liabilities

According to the last reported balance sheet, Xinjiang Tianye Water Saving Irrigation System had liabilities of CN¥525.1m due within 12 months, and liabilities of CN¥57.5m due beyond 12 months. On the other hand, it had cash of CN¥238.7m and CN¥164.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥179.1m.

The deficiency here weighs heavily on the CN¥84.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Xinjiang Tianye Water Saving Irrigation System would likely require a major re-capitalisation if it had to pay its creditors today. Xinjiang Tianye Water Saving Irrigation System boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. When analysing debt levels, the balance sheet is the obvious place to start. 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¥1.5b, which is a gain of 21%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

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 generated positive free cash flow CN¥54m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The saving grace for the stock is the strong revenue growth of 21% over the last twelve months. But the stock still looks risky to us. 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. We've identified 2 warning signs with Xinjiang Tianye Water Saving Irrigation System (at least 1 which is concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.