Tongdao Liepin Group (HKG:6100) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Tongdao Liepin Group (HKG:6100) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tongdao Liepin Group

How Much Debt Does Tongdao Liepin Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Tongdao Liepin Group had CN¥29.6m of debt, an increase on CN¥4.28m, over one year. But it also has CN¥2.22b in cash to offset that, meaning it has CN¥2.19b net cash.

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¥1.24b falling due within a year, and liabilities of CN¥82.4m due beyond that. Offsetting this, it had CN¥2.22b in cash and CN¥205.8m in receivables that were due within 12 months. So it can boast CN¥1.11b more liquid assets than total liabilities.

This excess liquidity is a great indication that Tongdao Liepin Group's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Tongdao Liepin Group has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Tongdao Liepin Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Tongdao Liepin Group had a loss before interest and tax, and actually shrunk its revenue by 18%, to CN¥2.3b. That's not what we would hope to see.

So How Risky Is Tongdao Liepin Group?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Tongdao Liepin Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥52m and booked a CN¥172m accounting loss. With only CN¥2.19b on the balance sheet, it would appear that its going to need to raise capital again 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. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Tongdao Liepin Group insider transactions.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.