These 4 Measures Indicate That Tianli Education International Holdings (HKG:1773) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Tianli Education International Holdings Limited (HKG:1773) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tianli Education International Holdings

What Is Tianli Education International Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Tianli Education International Holdings had debt of CN¥1.29b, up from CN¥459.0m in one year. However, it does have CN¥1.63b in cash offsetting this, leading to net cash of CN¥338.4m.

A Look At Tianli Education International Holdings' Liabilities

The latest balance sheet data shows that Tianli Education International Holdings had liabilities of CN¥2.25b due within a year, and liabilities of CN¥1.82b falling due after that. On the other hand, it had cash of CN¥1.63b and CN¥99.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.34b.

Since publicly traded Tianli Education International Holdings shares are worth a total of CN¥15.7b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Tianli Education International Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Tianli Education International Holdings grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tianli Education International Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Tianli Education International Holdings 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. Happily for any shareholders, Tianli Education International Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Tianli Education International Holdings does have more liabilities than liquid assets, it also has net cash of CN¥338.4m. The cherry on top was that in converted 173% of that EBIT to free cash flow, bringing in CN¥1.7b. So is Tianli Education International Holdings's debt a risk? It doesn't seem so 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. For example - Tianli Education International Holdings has 1 warning sign we think you should be aware of.

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.

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This article by Simply Wall St is general in nature. 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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