Is Golden Wheel Tiandi Holdings (HKG:1232) Weighed On By Its Debt Load?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Golden Wheel Tiandi Holdings Company Limited (HKG:1232) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Golden Wheel Tiandi Holdings's Debt?

As you can see below, Golden Wheel Tiandi Holdings had CN¥4.06b of debt at December 2024, down from CN¥4.33b a year prior. However, it does have CN¥97.9m in cash offsetting this, leading to net debt of about CN¥3.96b.

A Look At Golden Wheel Tiandi Holdings' Liabilities

The latest balance sheet data shows that Golden Wheel Tiandi Holdings had liabilities of CN¥6.89b due within a year, and liabilities of CN¥1.04b falling due after that. Offsetting this, it had CN¥97.9m in cash and CN¥316.8m in receivables that were due within 12 months. So it has liabilities totalling CN¥7.51b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥81.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Golden Wheel Tiandi Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Golden Wheel Tiandi Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

View our latest analysis for Golden Wheel Tiandi Holdings

In the last year Golden Wheel Tiandi Holdings had a loss before interest and tax, and actually shrunk its revenue by 67%, to CN¥796m. To be frank that doesn't bode well.

Caveat Emptor

While Golden Wheel Tiandi Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥43m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it burned through CN¥27m in the last year. So is this a high risk stock? We think so, and we'd avoid it. 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. Be aware that Golden Wheel Tiandi Holdings is showing 3 warning signs in our investment analysis , and 2 of those can't be ignored...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.