These 4 Measures Indicate That Tiande Chemical Holdings (HKG:609) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Tiande Chemical Holdings Limited (HKG:609) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Tiande Chemical Holdings

What Is Tiande Chemical Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Tiande Chemical Holdings had debt of CN¥15.9m at the end of June 2023, a reduction from CN¥85.3m over a year. But on the other hand it also has CN¥694.0m in cash, leading to a CN¥678.2m net cash position.

A Look At Tiande Chemical Holdings' Liabilities

The latest balance sheet data shows that Tiande Chemical Holdings had liabilities of CN¥448.1m due within a year, and liabilities of CN¥47.5m falling due after that. Offsetting these obligations, it had cash of CN¥694.0m as well as receivables valued at CN¥596.7m due within 12 months. So it can boast CN¥795.1m more liquid assets than total liabilities.

This luscious liquidity implies that Tiande Chemical 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. Succinctly put, Tiande Chemical Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Tiande Chemical Holdings's saving grace is its low debt levels, because its EBIT has tanked 30% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Tiande Chemical Holdings's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Tiande Chemical Holdings 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. Looking at the most recent three years, Tiande Chemical Holdings recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tiande Chemical Holdings has CN¥678.2m in net cash and a decent-looking balance sheet. So we are not troubled with Tiande Chemical Holdings's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Tiande Chemical Holdings that you should be aware of before investing here.

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.