Health Check: How Prudently Does Tianjin TEDA Biomedical Engineering (HKG:8189) Use Debt?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Tianjin TEDA Biomedical Engineering Company Limited (HKG:8189) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Tianjin TEDA Biomedical Engineering
How Much Debt Does Tianjin TEDA Biomedical Engineering Carry?
As you can see below, Tianjin TEDA Biomedical Engineering had CN¥11.5m of debt at June 2020, down from CN¥31.2m a year prior. However, it does have CN¥74.0m in cash offsetting this, leading to net cash of CN¥62.5m.
How Healthy Is Tianjin TEDA Biomedical Engineering's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Tianjin TEDA Biomedical Engineering had liabilities of CN¥130.0m due within 12 months and liabilities of CN¥1.39m due beyond that. Offsetting this, it had CN¥74.0m in cash and CN¥108.8m in receivables that were due within 12 months. So it actually has CN¥51.4m more liquid assets than total liabilities.
This surplus strongly suggests that Tianjin TEDA Biomedical Engineering has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that Tianjin TEDA Biomedical Engineering 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 it is Tianjin TEDA Biomedical Engineering's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Tianjin TEDA Biomedical Engineering made a loss at the EBIT level, and saw its revenue drop to CN¥326m, which is a fall of 11%. That's not what we would hope to see.
So How Risky Is Tianjin TEDA Biomedical Engineering?
While Tianjin TEDA Biomedical Engineering lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥10m. 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. 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. Take risks, for example - Tianjin TEDA Biomedical Engineering has 3 warning signs (and 1 which is a bit concerning) we think you should know about.
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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About SEHK:8189
Tianjin TEDA Biomedical Engineering
Engages in the research, development, manufacture, and sale of biological compound fertilizer products in the People’s Republic of China.
Adequate balance sheet low.