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Is Tongdao Liepin Group (HKG:6100) A Risky Investment?
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. As with many other companies Tongdao Liepin Group (HKG:6100) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Tongdao Liepin Group
What Is Tongdao Liepin Group's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2023 Tongdao Liepin Group had debt of CN¥20.7m, up from CN¥5.31m in one year. But it also has CN¥2.09b in cash to offset that, meaning it has CN¥2.07b net cash.
A Look At Tongdao Liepin Group's Liabilities
Zooming in on the latest balance sheet data, we can see that Tongdao Liepin Group had liabilities of CN¥1.30b due within 12 months and liabilities of CN¥116.8m due beyond that. Offsetting these obligations, it had cash of CN¥2.09b as well as receivables valued at CN¥186.5m due within 12 months. So it can boast CN¥862.6m more liquid assets than total liabilities.
This surplus suggests that Tongdao Liepin Group is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Tongdao Liepin Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Tongdao Liepin Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Tongdao Liepin Group had a loss before interest and tax, and actually shrunk its revenue by 10%, to CN¥2.5b. We would much prefer see growth.
So How Risky Is Tongdao Liepin Group?
Although Tongdao Liepin Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥5.7m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Tongdao Liepin Group that you should be aware of.
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.
Valuation is complex, but we're here to simplify it.
Discover if Tongdao Liepin Group might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
About SEHK:6100
Tongdao Liepin Group
An investment holding company, provides talent acquisition services in the People’s Republic of China.
Excellent balance sheet with moderate growth potential.