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. We note that Tibet Tianlu Co., Ltd. (SHSE:600326) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Tibet Tianlu
How Much Debt Does Tibet Tianlu Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2022 Tibet Tianlu had CN¥5.10b of debt, an increase on CN¥4.74b, over one year. However, it also had CN¥3.36b in cash, and so its net debt is CN¥1.74b.
A Look At Tibet Tianlu's Liabilities
We can see from the most recent balance sheet that Tibet Tianlu had liabilities of CN¥4.62b falling due within a year, and liabilities of CN¥2.87b due beyond that. Offsetting this, it had CN¥3.36b in cash and CN¥3.87b in receivables that were due within 12 months. So its liabilities total CN¥258.3m more than the combination of its cash and short-term receivables.
Given Tibet Tianlu has a market capitalization of CN¥5.06b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Tibet Tianlu 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, Tibet Tianlu made a loss at the EBIT level, and saw its revenue drop to CN¥4.6b, which is a fall of 29%. That makes us nervous, to say the least.
Caveat Emptor
While Tibet Tianlu's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥179m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of CN¥244m. So in short it's a really risky stock. 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. For example Tibet Tianlu has 2 warning signs (and 1 which is significant) we think you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.