Does Tian Chang Group Holdings (HKG:2182) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Tian Chang Group Holdings Ltd. (HKG:2182) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tian Chang Group Holdings

What Is Tian Chang Group Holdings's Net Debt?

As you can see below, Tian Chang Group Holdings had HK$64.0m of debt at June 2024, down from HK$120.5m a year prior. However, it does have HK$151.3m in cash offsetting this, leading to net cash of HK$87.3m.

How Healthy Is Tian Chang Group Holdings' Balance Sheet?

The latest balance sheet data shows that Tian Chang Group Holdings had liabilities of HK$170.5m due within a year, and liabilities of HK$22.8m falling due after that. Offsetting these obligations, it had cash of HK$151.3m as well as receivables valued at HK$109.5m due within 12 months. So it can boast HK$67.6m more liquid assets than total liabilities.

This luscious liquidity implies that Tian Chang Group Holdings' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Tian Chang Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Tian Chang Group Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Tian Chang Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 46%, to HK$524m. To be frank that doesn't bode well.

So How Risky Is Tian Chang Group Holdings?

Although Tian Chang Group Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$54m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. To that end, you should learn about the 3 warning signs we've spotted with Tian Chang Group Holdings (including 1 which shouldn't be ignored) .

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.