David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Tianjin Binhai Teda Logistics (Group) Corporation Limited (HKG:8348) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Tianjin Binhai Teda Logistics (Group) Carry?
As you can see below, Tianjin Binhai Teda Logistics (Group) had CN¥213.0m of debt at June 2021, down from CN¥349.5m a year prior. However, it does have CN¥277.4m in cash offsetting this, leading to net cash of CN¥64.4m.
A Look At Tianjin Binhai Teda Logistics (Group)'s Liabilities
According to the last reported balance sheet, Tianjin Binhai Teda Logistics (Group) had liabilities of CN¥686.1m due within 12 months, and liabilities of CN¥123.9m due beyond 12 months. Offsetting this, it had CN¥277.4m in cash and CN¥375.3m in receivables that were due within 12 months. So it has liabilities totalling CN¥157.2m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the CN¥91.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Tianjin Binhai Teda Logistics (Group) would likely require a major re-capitalisation if it had to pay its creditors today. Tianjin Binhai Teda Logistics (Group) boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. There's no doubt that we learn most about debt from the balance sheet. But it is Tianjin Binhai Teda Logistics (Group)'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.
Over 12 months, Tianjin Binhai Teda Logistics (Group) reported revenue of CN¥2.9b, which is a gain of 8.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Tianjin Binhai Teda Logistics (Group)?
Although Tianjin Binhai Teda Logistics (Group) had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥31m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. 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. Case in point: We've spotted 3 warning signs for Tianjin Binhai Teda Logistics (Group) you should be aware of, and 1 of them is concerning.
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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