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.' 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. As with many other companies Tech-Bank Food Co., Ltd. (SZSE:002124) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.
Check out our latest analysis for Tech-Bank Food
How Much Debt Does Tech-Bank Food Carry?
As you can see below, Tech-Bank Food had CN¥4.67b of debt at September 2023, down from CN¥5.11b a year prior. On the flip side, it has CN¥675.7m in cash leading to net debt of about CN¥3.99b.
A Look At Tech-Bank Food's Liabilities
We can see from the most recent balance sheet that Tech-Bank Food had liabilities of CN¥12.7b falling due within a year, and liabilities of CN¥3.49b due beyond that. Offsetting these obligations, it had cash of CN¥675.7m as well as receivables valued at CN¥144.7m due within 12 months. So its liabilities total CN¥15.4b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the CN¥6.77b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Tech-Bank Food would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Tech-Bank Food'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.
Over 12 months, Tech-Bank Food reported revenue of CN¥10b, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, Tech-Bank Food had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥1.4b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of CN¥2.1b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. For riskier companies like Tech-Bank Food 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.
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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