Here's Why Tianjin Binhai Teda Logistics (Group) (HKG:8348) Has A Meaningful Debt Burden

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.' 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, Tianjin Binhai Teda Logistics (Group) Corporation Limited (HKG:8348) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out the opportunities and risks within the HK Logistics industry.

What Is Tianjin Binhai Teda Logistics (Group)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Tianjin Binhai Teda Logistics (Group) had CN¥351.9m of debt, an increase on CN¥251.5m, over one year. However, its balance sheet shows it holds CN¥366.7m in cash, so it actually has CN¥14.8m net cash.

How Healthy Is Tianjin Binhai Teda Logistics (Group)'s Balance Sheet?

The latest balance sheet data shows that Tianjin Binhai Teda Logistics (Group) had liabilities of CN¥957.8m due within a year, and liabilities of CN¥103.2m falling due after that. Offsetting this, it had CN¥366.7m in cash and CN¥186.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥507.8m.

This deficit casts a shadow over the CN¥95.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Tianjin Binhai Teda Logistics (Group) would probably need a major re-capitalization if its creditors were to demand repayment. 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.

It was also good to see that despite losing money on the EBIT line last year, Tianjin Binhai Teda Logistics (Group) turned things around in the last 12 months, delivering and EBIT of CN¥78m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tianjin Binhai Teda Logistics (Group) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Tianjin Binhai Teda Logistics (Group) 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. Happily for any shareholders, Tianjin Binhai Teda Logistics (Group) actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Tianjin Binhai Teda Logistics (Group) does have more liabilities than liquid assets, it also has net cash of CN¥14.8m. The cherry on top was that in converted 156% of that EBIT to free cash flow, bringing in CN¥121m. So while Tianjin Binhai Teda Logistics (Group) does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Tianjin Binhai Teda Logistics (Group) has 3 warning signs (and 1 which shouldn't be ignored) 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. 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.