Is Tongdao Liepin Group (HKG:6100) Using Debt In A Risky Way?

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.' 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, Tongdao Liepin Group (HKG:6100) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Tongdao Liepin Group

What Is Tongdao Liepin Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Tongdao Liepin Group had CN¥80.1m of debt, an increase on CN¥11.1m, over one year. But it also has CN¥2.11b in cash to offset that, meaning it has CN¥2.03b net cash.

How Strong Is Tongdao Liepin Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tongdao Liepin Group had liabilities of CN¥1.33b due within 12 months and liabilities of CN¥103.7m due beyond that. Offsetting this, it had CN¥2.11b in cash and CN¥295.5m in receivables that were due within 12 months. So it can boast CN¥972.4m more liquid assets than total liabilities.

This excess liquidity suggests that Tongdao Liepin Group is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues 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! When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Tongdao Liepin Group made a loss at the EBIT level, and saw its revenue drop to CN¥2.4b, which is a fall of 16%. We would much prefer see growth.

So How Risky Is Tongdao Liepin Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Tongdao Liepin Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥52m and booked a CN¥90m accounting loss. Given it only has net cash of CN¥2.03b, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 example, we've discovered 1 warning sign for Tongdao Liepin Group that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.