Stock Analysis

Health Check: How Prudently Does Tianjin TEDA Biomedical Engineering (HKG:8189) Use Debt?

SEHK:8189
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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Tianjin TEDA Biomedical Engineering Company Limited (HKG:8189) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out the opportunities and risks within the HK Chemicals industry.

What Is Tianjin TEDA Biomedical Engineering's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Tianjin TEDA Biomedical Engineering had CN¥51.4m of debt, an increase on CN¥25.6m, over one year. However, its balance sheet shows it holds CN¥71.1m in cash, so it actually has CN¥19.7m net cash.

debt-equity-history-analysis
SEHK:8189 Debt to Equity History November 1st 2022

How Healthy Is Tianjin TEDA Biomedical Engineering's Balance Sheet?

According to the last reported balance sheet, Tianjin TEDA Biomedical Engineering had liabilities of CN¥363.5m due within 12 months, and liabilities of CN¥39.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥71.1m as well as receivables valued at CN¥99.5m due within 12 months. So it has liabilities totalling CN¥232.0m more than its cash and near-term receivables, combined.

Tianjin TEDA Biomedical Engineering has a market capitalization of CN¥402.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Tianjin TEDA Biomedical Engineering boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Tianjin TEDA Biomedical Engineering will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Tianjin TEDA Biomedical Engineering's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Tianjin TEDA Biomedical Engineering?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Tianjin TEDA Biomedical Engineering had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥76m of cash and made a loss of CN¥56m. But the saving grace is the CN¥19.7m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Tianjin TEDA Biomedical Engineering (3 are significant!) that you should be aware of before investing here.

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.

Valuation is complex, but we're here to simplify it.

Discover if Tianjin TEDA Biomedical Engineering might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.