Is Tianjin Development Holdings (HKG:882) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 can see that Tianjin Development Holdings Limited (HKG:882) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tianjin Development Holdings

How Much Debt Does Tianjin Development Holdings Carry?

The chart below, which you can click on for greater detail, shows that Tianjin Development Holdings had HK$2.33b in debt in December 2020; about the same as the year before. However, its balance sheet shows it holds HK$7.16b in cash, so it actually has HK$4.83b net cash.

A Look At Tianjin Development Holdings' Liabilities

We can see from the most recent balance sheet that Tianjin Development Holdings had liabilities of HK$4.58b falling due within a year, and liabilities of HK$2.26b due beyond that. On the other hand, it had cash of HK$7.16b and HK$1.61b worth of receivables due within a year. So it can boast HK$1.93b more liquid assets than total liabilities.

This luscious liquidity implies that Tianjin Development Holdings' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Tianjin Development Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tianjin Development Holdings 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.

Over 12 months, Tianjin Development Holdings made a loss at the EBIT level, and saw its revenue drop to HK$3.7b, which is a fall of 18%. We would much prefer see growth.

So How Risky Is Tianjin Development Holdings?

While Tianjin Development Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$294m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The next few years will be important as the business matures. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Tianjin Development Holdings you should be aware of, and 1 of them is potentially serious.

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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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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