Tian Teck Land (HKG:266) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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. We note that Tian Teck Land Limited (HKG:266) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Tian Teck Land

What Is Tian Teck Land's Debt?

The chart below, which you can click on for greater detail, shows that Tian Teck Land had HK$201.7m in debt in September 2020; about the same as the year before. However, it does have HK$571.0m in cash offsetting this, leading to net cash of HK$369.3m.

How Healthy Is Tian Teck Land's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tian Teck Land had liabilities of HK$324.1m due within 12 months and liabilities of HK$295.1m due beyond that. Offsetting this, it had HK$571.0m in cash and HK$160.2m in receivables that were due within 12 months. So it actually has HK$112.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Tian Teck Land could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Tian Teck Land boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Tian Teck Land's EBIT dived 17%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tian Teck Land's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Tian Teck Land has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Tian Teck Land recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Tian Teck Land has HK$369.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of HK$193m, being 73% of its EBIT. So we are not troubled with Tian Teck Land's debt use. 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 Tian Teck Land has 2 warning signs (and 1 which makes us a bit uncomfortable) we think 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.

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This article by Simply Wall St is general in nature. 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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