Is Tingyi (Cayman Islands) Holding (HKG:322) Using Too Much Debt?

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.' 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 Tingyi (Cayman Islands) Holding Corp. (HKG:322) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

View our latest analysis for Tingyi (Cayman Islands) Holding

What Is Tingyi (Cayman Islands) Holding's 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 it also has CN¥18.1b in cash to offset that, meaning it has CN¥439.6m net cash.

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

We can see from the most recent balance sheet that Tingyi (Cayman Islands) Holding had liabilities of CN¥32.4b falling due within a year, 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 total CN¥23.5b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Tingyi (Cayman Islands) Holding has a market capitalization of CN¥60.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Tingyi (Cayman Islands) Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

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 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. 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 cold hard cash means it can reduce its debt when it wants to.

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. 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. Be aware that Tingyi (Cayman Islands) Holding is showing 1 warning sign in our investment analysis , you should know about...

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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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.