Tianyun International Holdings (HKG:6836) Has A Pretty Healthy Balance Sheet

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.' 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 the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that 6836 is potentially undervalued!

What Is Tianyun International Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Tianyun International Holdings had debt of CN¥188.5m at the end of June 2022, a reduction from CN¥267.4m over a year. But on the other hand it also has CN¥565.9m in cash, leading to a CN¥377.4m net cash position.

How Strong Is Tianyun International Holdings' Balance Sheet?

The latest balance sheet data shows that Tianyun International Holdings had liabilities of CN¥274.6m due within a year, and liabilities of CN¥7.18m falling due after that. Offsetting this, it had CN¥565.9m in cash and CN¥177.7m in receivables that were due within 12 months. So it actually has CN¥462.0m more liquid assets than total liabilities.

This luscious liquidity implies that Tianyun International Holdings' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Tianyun International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Tianyun International Holdings's load is not too heavy, because its EBIT was down 38% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tianyun International Holdings 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 29% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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¥377.4m, as well as more liquid assets than liabilities. So we are not troubled with Tianyun International Holdings's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Tianyun International Holdings you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.