Is Tianjin TEDA Biomedical Engineering (HKG:8189) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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?

What Risk Does Debt Bring?

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. 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. 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 Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Tianjin TEDA Biomedical Engineering had debt of CN¥25.6m, up from CN¥17.7m in one year. However, it does have CN¥93.0m in cash offsetting this, leading to net cash of CN¥67.4m.

A Look At Tianjin TEDA Biomedical Engineering's Liabilities

According to the last reported balance sheet, Tianjin TEDA Biomedical Engineering had liabilities of CN¥244.1m due within 12 months, and liabilities of CN¥37.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥93.0m as well as receivables valued at CN¥71.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥117.2m.

This deficit isn't so bad because Tianjin TEDA Biomedical Engineering is worth CN¥435.8m, and thus could probably raise enough capital to shore up 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. While it does have liabilities worth noting, Tianjin TEDA Biomedical Engineering also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tianjin TEDA Biomedical Engineering's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Tianjin TEDA Biomedical Engineering reported revenue of CN¥446m, which is a gain of 38%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

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¥57m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive is that Tianjin TEDA Biomedical Engineering is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. 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. Be aware that Tianjin TEDA Biomedical Engineering is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.

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.

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