Is Tianjin TEDA Biomedical Engineering (HKG:8189) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Tianjin TEDA Biomedical Engineering Company Limited (HKG:8189) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tianjin TEDA Biomedical Engineering

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 December 2022 Tianjin TEDA Biomedical Engineering had CN¥56.8m of debt, an increase on CN¥47.4m, over one year. However, it does have CN¥7.21m in cash offsetting this, leading to net debt of about CN¥49.6m.

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¥218.2m due within 12 months and liabilities of CN¥35.2m due beyond that. Offsetting these obligations, it had cash of CN¥7.21m as well as receivables valued at CN¥31.9m due within 12 months. So it has liabilities totalling CN¥214.4m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥215.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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.

In the last year Tianjin TEDA Biomedical Engineering had a loss before interest and tax, and actually shrunk its revenue by 5.6%, to CN¥450m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Tianjin TEDA Biomedical Engineering produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥27m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥28m into a profit. So to be blunt we do think it is risky. 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 instance, we've identified 2 warning signs for Tianjin TEDA Biomedical Engineering that you should be aware of.

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.