Tianli Holdings Group (HKG:117) has a somewhat stretched balance sheet
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We can see that Tianli Holdings Group Limited (HKG:117) uses debt in its business. But the more important question is: what risk does this debt create?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for Tianli Holdings Group
What is Tianli Holdings Group’s net debt?
As you can see below, at the end of December 2021, Tianli Holdings Group had 391.0 million yen in debt, compared to 220.1 million yen a year ago. Click on the image for more details. However, he has 62.9 million national yen of cash to offset this, resulting in a net debt of approximately 328.2 million national yen.
How strong is Tianli Holdings Group’s balance sheet?
The latest balance sheet data shows that Tianli Holdings Group had liabilities of 578.6 million yen maturing within one year, and liabilities of 62.5 million yen maturing thereafter. In return, he had 62.9 million Canadian yen in cash and 191.0 million domestic yen in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 387.3 million Canadian yen.
Given that this deficit is actually greater than the company’s market capitalization of 293.4 million Canadian yen, we think shareholders really should be watching Tianli Holdings Group’s debt levels, like a parent watching their child. riding a bike for the first time. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Tianli Holdings Group has a debt to EBITDA ratio of 3.0 and its EBIT covered its interest expense 2.8 times. This suggests that while debt levels are significant, we will refrain from labeling them as problematic. The silver lining is that Tianli Holdings Group increased its EBIT by 729% last year, which feeds like youthful idealism. If he can keep walking on this path, he will be able to get rid of his debt with relative ease. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since Tianli Holdings Group will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past two years, Tianli Holdings Group has recorded substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of this situation in due course, this clearly means that its use of debt is more risky.
Our point of view
At first glance, the level of Tianli Holdings Group’s total liabilities left us hesitant about the stock, and its EBIT to free cash flow conversion was no more appealing than the single empty restaurant on the busiest night in the year. But on the bright side, its EBIT growth rate is a good sign and makes us more optimistic. Overall, it seems to us that the balance sheet of Tianli Holdings Group is really a risk for the company. We are therefore almost as wary of this stock as a hungry kitten of falling into its owner’s fish pond: once bitten, twice shy, as they say. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. Know that Tianli Holdings Group shows 1 warning sign in our investment analysis you should know…
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.