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.' 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 Tianjin Benefo Tejing Electric Co., Ltd. (SHSE:600468) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Tianjin Benefo Tejing Electric
What Is Tianjin Benefo Tejing Electric's Net Debt?
As you can see below, Tianjin Benefo Tejing Electric had CN¥298.2m of debt at September 2023, down from CN¥372.7m a year prior. However, it does have CN¥567.9m in cash offsetting this, leading to net cash of CN¥269.7m.
How Strong Is Tianjin Benefo Tejing Electric's Balance Sheet?
According to the last reported balance sheet, Tianjin Benefo Tejing Electric had liabilities of CN¥1.52b due within 12 months, and liabilities of CN¥80.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥567.9m as well as receivables valued at CN¥1.39b due within 12 months. So it can boast CN¥364.8m more liquid assets than total liabilities.
This surplus suggests that Tianjin Benefo Tejing Electric has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tianjin Benefo Tejing Electric boasts net cash, so it's fair to say it does not have a heavy debt load!
The good news is that Tianjin Benefo Tejing Electric has increased its EBIT by 4.4% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Tianjin Benefo Tejing Electric 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Tianjin Benefo Tejing Electric 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. During the last three years, Tianjin Benefo Tejing Electric generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Tianjin Benefo Tejing Electric has net cash of CN¥269.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥100m, being 98% of its EBIT. So we don't think Tianjin Benefo Tejing Electric's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Tianjin Benefo Tejing Electric .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.