Is TL Natural Gas Holdings (HKG:8536) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, TL Natural Gas Holdings Limited (HKG:8536) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for TL Natural Gas Holdings

What Is TL Natural Gas Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 TL Natural Gas Holdings had debt of CN¥13.6m, up from CN¥4.75m in one year. However, it does have CN¥15.5m in cash offsetting this, leading to net cash of CN¥1.91m.

How Healthy Is TL Natural Gas Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TL Natural Gas Holdings had liabilities of CN¥13.7m due within 12 months and liabilities of CN¥6.87m due beyond that. Offsetting this, it had CN¥15.5m in cash and CN¥6.27m in receivables that were due within 12 months. So it actually has CN¥1.20m more liquid assets than total liabilities.

Having regard to TL Natural Gas Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥67.3m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that TL Natural Gas Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is TL Natural Gas 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.

Over 12 months, TL Natural Gas Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥50m, which is a fall of 5.3%. That's not what we would hope to see.

So How Risky Is TL Natural Gas Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year TL Natural Gas Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥4.5m of cash and made a loss of CN¥22m. Given it only has net cash of CN¥1.91m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that TL Natural Gas Holdings is showing 5 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.