Is Tianyun International Holdings (HKG:6836) A Risky Investment?

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.' 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 Tianyun International Holdings Limited (HKG:6836) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tianyun International Holdings

How Much Debt Does Tianyun International Holdings Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Tianyun International Holdings had debt of CN¥261.9m, up from CN¥223.7m in one year. However, its balance sheet shows it holds CN¥528.3m in cash, so it actually has CN¥266.4m net cash.

How Healthy Is Tianyun International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tianyun International Holdings had liabilities of CN¥343.2m due within 12 months and liabilities of CN¥4.59m due beyond that. Offsetting these obligations, it had cash of CN¥528.3m as well as receivables valued at CN¥176.4m due within 12 months. So it actually has CN¥357.0m more liquid assets than total liabilities.

This surplus suggests that Tianyun International Holdings is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Tianyun International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Tianyun International Holdings's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Tianyun International Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Tianyun International Holdings 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. Looking at the most recent three years, Tianyun International Holdings recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Tianyun International Holdings has net cash of CN¥266.4m, as well as more liquid assets than liabilities. So we are not troubled with Tianyun International Holdings's debt use. We'd be motivated to research the stock further if we found out that Tianyun International Holdings insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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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