Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that TECON BIOLOGY Co.LTD (SZSE:002100) does use debt in its business. 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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for TECON BIOLOGYLTD
What Is TECON BIOLOGYLTD's Debt?
As you can see below, TECON BIOLOGYLTD had CN¥5.15b of debt at September 2023, down from CN¥6.73b a year prior. On the flip side, it has CN¥3.84b in cash leading to net debt of about CN¥1.31b.
How Healthy Is TECON BIOLOGYLTD's Balance Sheet?
According to the last reported balance sheet, TECON BIOLOGYLTD had liabilities of CN¥5.47b due within 12 months, and liabilities of CN¥2.35b due beyond 12 months. Offsetting this, it had CN¥3.84b in cash and CN¥1.17b in receivables that were due within 12 months. So it has liabilities totalling CN¥2.81b more than its cash and near-term receivables, combined.
This deficit isn't so bad because TECON BIOLOGYLTD is worth CN¥10.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if TECON BIOLOGYLTD 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.
In the last year TECON BIOLOGYLTD wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to CN¥19b. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Over the last twelve months TECON BIOLOGYLTD produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥242m at the EBIT level. 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. 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¥461m. So we do think this stock is quite risky. 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. For example - TECON BIOLOGYLTD has 1 warning sign we think you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
