Is Tianjin Binhai Teda Logistics (Group) (HKG:8348) A Risky Investment?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Tianjin Binhai Teda Logistics (Group) Corporation Limited (HKG:8348) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tianjin Binhai Teda Logistics (Group)

How Much Debt Does Tianjin Binhai Teda Logistics (Group) Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Tianjin Binhai Teda Logistics (Group) had CN¥340.2m of debt, an increase on CN¥325.0m, over one year. However, its balance sheet shows it holds CN¥414.6m in cash, so it actually has CN¥74.5m 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¥1.14b due within a year, and liabilities of CN¥93.4m falling due after that. Offsetting this, it had CN¥414.6m in cash and CN¥332.4m in receivables that were due within 12 months. So its liabilities total CN¥489.1m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥104.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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.

Shareholders should be aware that Tianjin Binhai Teda Logistics (Group)'s EBIT was down 41% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. 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. Tianjin Binhai Teda Logistics (Group) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Tianjin Binhai Teda Logistics (Group) actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Tianjin Binhai Teda Logistics (Group)'s balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥74.5m. And it impressed us with free cash flow of CN¥60m, being 147% of its EBIT. Despite its cash we think that Tianjin Binhai Teda Logistics (Group) seems to struggle to handle its total liabilities, so we are wary of the stock. 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, we've discovered 5 warning signs for Tianjin Binhai Teda Logistics (Group) (1 is concerning!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.