Is TANSH Global Food Group (HKG:3666) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, TANSH Global Food Group Co., Ltd (HKG:3666) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for TANSH Global Food Group

What Is TANSH Global Food Group's Debt?

The image below, which you can click on for greater detail, shows that TANSH Global Food Group had debt of CN¥23.6m at the end of June 2021, a reduction from CN¥44.6m over a year. But it also has CN¥91.9m in cash to offset that, meaning it has CN¥68.3m net cash.

How Strong Is TANSH Global Food Group's Balance Sheet?

According to the last reported balance sheet, TANSH Global Food Group had liabilities of CN¥302.2m due within 12 months, and liabilities of CN¥196.3m due beyond 12 months. Offsetting this, it had CN¥91.9m in cash and CN¥9.97m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥396.7m.

The deficiency here weighs heavily on the CN¥119.0m 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'd watch its balance sheet closely, without a doubt. At the end of the day, TANSH Global Food Group would probably need a major re-capitalization if its creditors were to demand repayment. Given that TANSH Global Food Group has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since TANSH Global Food 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 TANSH Global Food Group had a loss before interest and tax, and actually shrunk its revenue by 4.1%, to CN¥778m. That's not what we would hope to see.

So How Risky Is TANSH Global Food Group?

While TANSH Global Food Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥97m. 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. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. 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. We've identified 2 warning signs with TANSH Global Food Group (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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