Tianjin TEDA Biomedical Engineering (HKG:8189) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. 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?

The image below, which you can click on for greater detail, shows that Tianjin TEDA Biomedical Engineering had debt of CN¥15.8m at the end of December 2020, a reduction from CN¥31.2m over a year. However, it does have CN¥35.5m in cash offsetting this, leading to net cash of CN¥19.7m.

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

We can see from the most recent balance sheet that Tianjin TEDA Biomedical Engineering had liabilities of CN¥194.3m falling due within a year, and liabilities of CN¥43.5m due beyond that. Offsetting this, it had CN¥35.5m in cash and CN¥59.0m in receivables that were due within 12 months. So it has liabilities totalling CN¥143.3m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥144.0m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 3.0%, to CN¥369m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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¥30m. 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 revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Tianjin TEDA Biomedical Engineering (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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. 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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