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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Zhuzhou Tianqiao Crane Co., Ltd. (SZSE:002523) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Zhuzhou Tianqiao Crane's Debt?
As you can see below, at the end of September 2023, Zhuzhou Tianqiao Crane had CN¥360.5m of debt, up from CN¥257.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥777.0m in cash, so it actually has CN¥416.5m net cash.
How Strong Is Zhuzhou Tianqiao Crane's Balance Sheet?
According to the last reported balance sheet, Zhuzhou Tianqiao Crane had liabilities of CN¥1.62b due within 12 months, and liabilities of CN¥184.6m due beyond 12 months. On the other hand, it had cash of CN¥777.0m and CN¥1.55b worth of receivables due within a year. So it actually has CN¥518.8m more liquid assets than total liabilities.
This short term liquidity is a sign that Zhuzhou Tianqiao Crane could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Zhuzhou Tianqiao Crane boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Zhuzhou Tianqiao Crane 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.
In the last year Zhuzhou Tianqiao Crane had a loss before interest and tax, and actually shrunk its revenue by 13%, to CN¥1.5b. We would much prefer see growth.
So How Risky Is Zhuzhou Tianqiao Crane?
Although Zhuzhou Tianqiao Crane had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥923k. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Zhuzhou Tianqiao Crane is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...
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.