Yahoo Finanza Xinjiang Tianye Water Saving Irrigation System (HKG:840) Has Debt But No Earnings; Should You Worry?
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 Xinjiang Tianye Water Saving Irrigation System Company Limited (HKG:840) makes use of 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Xinjiang Tianye Water Saving Irrigation System
How Much Debt Does Xinjiang Tianye Water Saving Irrigation System Carry?
The chart below, which you can click on for greater detail, shows that Xinjiang Tianye Water Saving Irrigation System had CN¥31.0m in debt in December 2019; about the same as the year before. But on the other hand it also has CN¥63.2m in cash, leading to a CN¥32.2m net cash position.
How Healthy Is Xinjiang Tianye Water Saving Irrigation System's Balance Sheet?
According to the last reported balance sheet, Xinjiang Tianye Water Saving Irrigation System had liabilities of CN¥293.3m due within 12 months, and liabilities of CN¥7.58m due beyond 12 months. Offsetting this, it had CN¥63.2m in cash and CN¥221.6m in receivables that were due within 12 months. So it has liabilities totalling CN¥16.1m more than its cash and near-term receivables, combined.
Of course, Xinjiang Tianye Water Saving Irrigation System has a market capitalization of CN¥138.5m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Xinjiang Tianye Water Saving Irrigation System also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Xinjiang Tianye Water Saving Irrigation System's earnings that will influence how the balance sheet holds up in the future. 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.
In the last year Xinjiang Tianye Water Saving Irrigation System wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to CN¥624m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Xinjiang Tianye Water Saving Irrigation System?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Xinjiang Tianye Water Saving Irrigation System had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of CN¥45m and booked a CN¥48m accounting loss. However, it has net cash of CN¥32.2m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Xinjiang Tianye Water Saving Irrigation System has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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This article by Simply Wall St is general in nature. 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. Thank you for reading.
