Tianjin Development Holdings (HKG:882) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Tianjin Development Holdings Limited (HKG:882) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Tianjin Development Holdings

How Much Debt Does Tianjin Development Holdings Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Tianjin Development Holdings had debt of HK$1.81b, up from HK$1.56b in one year. But it also has HK$6.91b in cash to offset that, meaning it has HK$5.10b net cash.

A Look At Tianjin Development Holdings' Liabilities

According to the last reported balance sheet, Tianjin Development Holdings had liabilities of HK$2.83b due within 12 months, and liabilities of HK$1.95b due beyond 12 months. On the other hand, it had cash of HK$6.91b and HK$2.04b worth of receivables due within a year. So it can boast HK$4.16b more liquid assets than total liabilities.

This excess liquidity is a great indication that Tianjin Development Holdings' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Tianjin Development Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Tianjin Development Holdings grew its EBIT by 935% over twelve months. That boost will make it even easier to pay down debt going forward. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Tianjin Development Holdings 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. Over the most recent two years, Tianjin Development Holdings recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that Tianjin Development Holdings has net cash of HK$5.10b and plenty of liquid assets. And we liked the look of last year's 935% year-on-year EBIT growth. The bottom line is that we do not find Tianjin Development Holdings's debt levels at all concerning. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Tianjin Development Holdings that you should be aware of.

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.