Here's Why Tingyi (Cayman Islands) Holding (HKG:322) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Tingyi (Cayman Islands) Holding Corp. (HKG:322) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Tingyi (Cayman Islands) Holding

How Much Debt Does Tingyi (Cayman Islands) Holding Carry?

The chart below, which you can click on for greater detail, shows that Tingyi (Cayman Islands) Holding had CN¥15.3b in debt in June 2021; about the same as the year before. But on the other hand it also has CN¥23.2b in cash, leading to a CN¥7.84b net cash position.

How Healthy Is Tingyi (Cayman Islands) Holding's Balance Sheet?

According to the last reported balance sheet, Tingyi (Cayman Islands) Holding had liabilities of CN¥32.8b due within 12 months, and liabilities of CN¥10.7b due beyond 12 months. Offsetting these obligations, it had cash of CN¥23.2b as well as receivables valued at CN¥2.14b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥18.1b.

This deficit isn't so bad because Tingyi (Cayman Islands) Holding is worth a massive CN¥72.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Tingyi (Cayman Islands) Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

While Tingyi (Cayman Islands) Holding doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Tingyi (Cayman Islands) Holding's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Tingyi (Cayman Islands) Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Tingyi (Cayman Islands) Holding actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Tingyi (Cayman Islands) Holding does have more liabilities than liquid assets, it also has net cash of CN¥7.84b. And it impressed us with free cash flow of CN¥3.0b, being 121% of its EBIT. So is Tingyi (Cayman Islands) Holding's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Tingyi (Cayman Islands) Holding , and understanding them should be part of your investment process.

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.