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.' 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 Tsinghua Tongfang Co., Ltd. (SHSE:600100) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Tsinghua Tongfang Carry?

As you can see below, Tsinghua Tongfang had CN¥16.1b of debt at September 2024, down from CN¥19.1b a year prior. On the flip side, it has CN¥5.98b in cash leading to net debt of about CN¥10.1b.

How Healthy Is Tsinghua Tongfang's Balance Sheet?

We can see from the most recent balance sheet that Tsinghua Tongfang had liabilities of CN¥18.5b falling due within a year, and liabilities of CN¥11.8b due beyond that. Offsetting these obligations, it had cash of CN¥5.98b as well as receivables valued at CN¥9.62b due within 12 months. So it has liabilities totalling CN¥14.6b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Tsinghua Tongfang has a market capitalization of CN¥24.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Tsinghua Tongfang can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Tsinghua Tongfang made a loss at the EBIT level, and saw its revenue drop to CN¥20b, which is a fall of 29%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Tsinghua Tongfang's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥23m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥162m of cash over the last year. So to be blunt we think it is risky. For riskier companies like Tsinghua Tongfang I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.