Is TANSH Global Food Group (HKG:3666) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that TANSH Global Food Group Co., Ltd (HKG:3666) does have debt on its balance sheet. 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 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for TANSH Global Food Group

What Is TANSH Global Food Group's Net Debt?

As you can see below, at the end of December 2020, TANSH Global Food Group had CN¥39.0m of debt, up from CN¥12.4m a year ago. Click the image for more detail. But on the other hand it also has CN¥113.4m in cash, leading to a CN¥74.4m net cash position.

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

Zooming in on the latest balance sheet data, we can see that TANSH Global Food Group had liabilities of CN¥339.5m due within 12 months and liabilities of CN¥137.1m due beyond that. On the other hand, it had cash of CN¥113.4m and CN¥16.6m worth of receivables due within a year. So it has liabilities totalling CN¥346.6m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥153.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, TANSH Global Food Group would likely require a major re-capitalisation if it had to pay its creditors today. TANSH Global Food Group 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 TANSH Global Food Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, TANSH Global Food Group made a loss at the EBIT level, and saw its revenue drop to CN¥644m, which is a fall of 47%. That makes us nervous, to say the least.

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¥47m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for TANSH Global Food Group you should be aware of, and 1 of them shouldn't be ignored.

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.

If you decide to trade TANSH Global Food Group, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.