Tianjin TEDA Biomedical Engineering (HKG:8189) Is Making Moderate Use Of Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Tianjin TEDA Biomedical Engineering Company Limited (HKG:8189) does have debt on its balance sheet. 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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Tianjin TEDA Biomedical Engineering

What Is Tianjin TEDA Biomedical Engineering's Net Debt?

As you can see below, at the end of December 2021, Tianjin TEDA Biomedical Engineering had CN¥47.4m of debt, up from CN¥15.8m a year ago. Click the image for more detail. However, it also had CN¥27.4m in cash, and so its net debt is CN¥20.0m.

How Strong 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¥192.0m due within 12 months and liabilities of CN¥45.2m due beyond that. Offsetting these obligations, it had cash of CN¥27.4m as well as receivables valued at CN¥42.9m due within 12 months. So it has liabilities totalling CN¥166.9m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥253.3m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 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 reported revenue of CN¥476m, which is a gain of 29%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Tianjin TEDA Biomedical Engineering still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥18m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥42m. 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 3 warning signs for Tianjin TEDA Biomedical Engineering (1 is potentially serious) 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.