Is Tianjin TEDA Biomedical Engineering (HKG:8189) Weighed On By Its Debt Load?

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. 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.

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Tianjin TEDA Biomedical Engineering

What Is Tianjin TEDA Biomedical Engineering's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Tianjin TEDA Biomedical Engineering had CN¥56.8m of debt, an increase on CN¥51.4m, over one year. But on the other hand it also has CN¥57.2m in cash, leading to a CN¥439.7k net cash position.

A Look At Tianjin TEDA Biomedical Engineering's Liabilities

We can see from the most recent balance sheet that Tianjin TEDA Biomedical Engineering had liabilities of CN¥221.6m falling due within a year, and liabilities of CN¥35.2m due beyond that. On the other hand, it had cash of CN¥57.2m and CN¥31.9m worth of receivables due within a year. So its liabilities total CN¥167.7m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CN¥157.0m, we think shareholders really should watch Tianjin TEDA Biomedical Engineering's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that Tianjin TEDA Biomedical Engineering has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tianjin TEDA Biomedical Engineering will need earnings to service that debt. 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¥430m, which is a fall of 2.1%. We would much prefer see growth.

So How Risky Is Tianjin TEDA Biomedical Engineering?

Although Tianjin TEDA Biomedical Engineering had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥3.8m. 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. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Tianjin TEDA Biomedical Engineering that you should be aware of.

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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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.