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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Baoding Tianwei Baobian Electric Co.,Ltd. (SHSE:600550) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Baoding Tianwei Baobian ElectricLtd Carry?
As you can see below, at the end of March 2024, Baoding Tianwei Baobian ElectricLtd had CN¥2.18b of debt, up from CN¥1.64b a year ago. Click the image for more detail. However, it does have CN¥690.9m in cash offsetting this, leading to net debt of about CN¥1.49b.
A Look At Baoding Tianwei Baobian ElectricLtd's Liabilities
According to the last reported balance sheet, Baoding Tianwei Baobian ElectricLtd had liabilities of CN¥5.02b due within 12 months, and liabilities of CN¥919.3m due beyond 12 months. On the other hand, it had cash of CN¥690.9m and CN¥2.21b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.04b.
While this might seem like a lot, it is not so bad since Baoding Tianwei Baobian ElectricLtd has a market capitalization of CN¥8.71b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Baoding Tianwei Baobian ElectricLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Baoding Tianwei Baobian ElectricLtd reported revenue of CN¥3.6b, which is a gain of 5.7%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months Baoding Tianwei Baobian ElectricLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥74m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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¥209m. So to be blunt we do think it is risky. For riskier companies like Baoding Tianwei Baobian ElectricLtd 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.
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.