Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Tianjin Port Holdings Co., Ltd. (SHSE:600717) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

How Much Debt Does Tianjin Port Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Tianjin Port Holdings had CN¥4.87b of debt in September 2024, down from CN¥5.46b, one year before. But it also has CN¥5.76b in cash to offset that, meaning it has CN¥893.5m net cash.

How Healthy Is Tianjin Port Holdings' Balance Sheet?

We can see from the most recent balance sheet that Tianjin Port Holdings had liabilities of CN¥5.77b falling due within a year, and liabilities of CN¥3.87b due beyond that. Offsetting these obligations, it had cash of CN¥5.76b as well as receivables valued at CN¥2.07b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.80b.

Of course, Tianjin Port Holdings has a market capitalization of CN¥14.5b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Tianjin Port Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Tianjin Port Holdings saw its EBIT decline by 6.9% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Tianjin Port Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Tianjin Port 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 last three years, Tianjin Port Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Tianjin Port Holdings does have more liabilities than liquid assets, it also has net cash of CN¥893.5m. The cherry on top was that in converted 113% of that EBIT to free cash flow, bringing in CN¥1.8b. So is Tianjin Port Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Tianjin Port Holdings that you should be aware of.

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. 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.