Is Tingyi (Cayman Islands) Holding (HKG:322) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Tingyi (Cayman Islands) Holding Corp. (HKG:322) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Tingyi (Cayman Islands) Holding

What Is Tingyi (Cayman Islands) Holding's Net Debt?

As you can see below, Tingyi (Cayman Islands) Holding had CN¥17.6b of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥18.1b in cash, leading to a CN¥439.6m net cash position.

A Look At Tingyi (Cayman Islands) Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Tingyi (Cayman Islands) Holding had liabilities of CN¥32.4b due within 12 months and liabilities of CN¥11.2b due beyond that. Offsetting this, it had CN¥18.1b in cash and CN¥2.12b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥23.5b.

Tingyi (Cayman Islands) Holding has a market capitalization of CN¥47.6b, so it could very likely raise cash to ameliorate 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.

Fortunately, Tingyi (Cayman Islands) Holding grew its EBIT by 7.2% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Tingyi (Cayman Islands) Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Tingyi (Cayman Islands) Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Tingyi (Cayman Islands) Holding produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Tingyi (Cayman Islands) Holding's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥439.6m. So we are not troubled with Tingyi (Cayman Islands) Holding's debt use. 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. For instance, we've identified 1 warning sign for Tingyi (Cayman Islands) Holding that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.