Is Golden Wheel Tiandi Holdings (HKG:1232) 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.' 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 Golden Wheel Tiandi Holdings Company Limited (HKG:1232) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for Golden Wheel Tiandi Holdings

What Is Golden Wheel Tiandi Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Golden Wheel Tiandi Holdings had CN¥5.94b of debt in June 2021, down from CN¥6.73b, one year before. However, because it has a cash reserve of CN¥1.25b, its net debt is less, at about CN¥4.69b.

How Strong Is Golden Wheel Tiandi Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Golden Wheel Tiandi Holdings had liabilities of CN¥9.54b due within 12 months and liabilities of CN¥2.89b due beyond that. Offsetting these obligations, it had cash of CN¥1.25b as well as receivables valued at CN¥351.7m due within 12 months. So it has liabilities totalling CN¥10.8b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥330.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. 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.

In the last year Golden Wheel Tiandi Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 48%, to CN¥2.2b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Golden Wheel Tiandi Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping CN¥134m. 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 on the bright side the company actually produced a statutory profit of CN¥110m and free cash flow of CN¥489m. So its situation may not be as precarious as the EBIT would imply. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Golden Wheel Tiandi Holdings (of which 2 are a bit concerning!) you should know about.

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.

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.

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