TANSH Global Food Group (HKG:3666) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 TANSH Global Food Group Co., Ltd (HKG:3666) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for TANSH Global Food Group

What Is TANSH Global Food Group's Debt?

You can click the graphic below for the historical numbers, but it shows that TANSH Global Food Group had CN¥44.6m of debt in June 2020, down from CN¥104.0m, one year before. However, its balance sheet shows it holds CN¥170.4m in cash, so it actually has CN¥125.7m net cash.

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

The latest balance sheet data shows that TANSH Global Food Group had liabilities of CN¥369.4m due within a year, and liabilities of CN¥167.1m falling due after that. On the other hand, it had cash of CN¥170.4m and CN¥12.6m worth of receivables due within a year. So its liabilities total CN¥353.5m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥162.6m 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, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is TANSH Global Food Group's earnings that will influence how the balance sheet holds up in the future. 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¥812m, which is a fall of 42%. To be frank that doesn't bode well.

So How Risky Is TANSH Global Food Group?

Although TANSH Global Food Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥37m. 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. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. 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. To that end, you should learn about the 3 warning signs we've spotted with TANSH Global Food Group (including 1 which is doesn't sit too well with us) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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