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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, TANSH Global Food Group Co., Ltd (HKG:3666) does carry 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for TANSH Global Food Group

What Is TANSH Global Food Group's Debt?

As you can see below, TANSH Global Food Group had CN¥31.3m of debt at December 2021, down from CN¥39.0m a year prior. But it also has CN¥78.5m in cash to offset that, meaning it has CN¥47.2m net cash.

A Look At TANSH Global Food Group's Liabilities

The latest balance sheet data shows that TANSH Global Food Group had liabilities of CN¥302.8m due within a year, and liabilities of CN¥192.2m falling due after that. Offsetting these obligations, it had cash of CN¥78.5m as well as receivables valued at CN¥5.47m due within 12 months. So its liabilities total CN¥411.2m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥137.2m 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 reported revenue of CN¥692m, which is a gain of 7.3%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

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¥92m. 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. 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. For instance, we've identified 3 warning signs for TANSH Global Food Group (1 doesn't sit too well with us) 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. 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.