Does Tongdao Liepin Group (HKG:6100) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Tongdao Liepin Group (HKG:6100) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Our analysis indicates that 6100 is potentially overvalued!

How Much Debt Does Tongdao Liepin Group Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Tongdao Liepin Group had debt of CN¥11.1m, up from CN¥3.00m in one year. However, it does have CN¥421.5m in cash offsetting this, leading to net cash of CN¥410.4m.

How Healthy Is Tongdao Liepin Group's Balance Sheet?

We can see from the most recent balance sheet that Tongdao Liepin Group had liabilities of CN¥1.38b falling due within a year, and liabilities of CN¥84.8m due beyond that. Offsetting this, it had CN¥421.5m in cash and CN¥262.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥776.0m.

This deficit isn't so bad because Tongdao Liepin Group is worth CN¥3.14b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Tongdao Liepin Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Tongdao Liepin Group grew its EBIT by 79% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tongdao Liepin Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Tongdao Liepin Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Tongdao Liepin Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Tongdao Liepin Group does have more liabilities than liquid assets, it also has net cash of CN¥410.4m. The cherry on top was that in converted 296% of that EBIT to free cash flow, bringing in CN¥491m. So we don't think Tongdao Liepin Group's use of debt is risky. Another factor that would give us confidence in Tongdao Liepin Group would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.