Is Tangrenshen Group (SZSE:002567) Weighed On By Its Debt Load?

Simply Wall St · 10/15 04:55

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.' 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 Tangrenshen Group Co., Ltd (SZSE:002567) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tangrenshen Group

What Is Tangrenshen Group's Debt?

As you can see below, at the end of June 2024, Tangrenshen Group had CN¥7.01b of debt, up from CN¥6.48b a year ago. Click the image for more detail. However, it also had CN¥2.02b in cash, and so its net debt is CN¥4.99b.

debt-equity-history-analysis
SZSE:002567 Debt to Equity History October 15th 2024

How Healthy Is Tangrenshen Group's Balance Sheet?

We can see from the most recent balance sheet that Tangrenshen Group had liabilities of CN¥5.85b falling due within a year, and liabilities of CN¥5.81b due beyond that. Offsetting this, it had CN¥2.02b in cash and CN¥589.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥9.05b.

Given this deficit is actually higher than the company's market capitalization of CN¥7.48b, we think shareholders really should watch Tangrenshen Group's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Tangrenshen Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Tangrenshen Group made a loss at the EBIT level, and saw its revenue drop to CN¥24b, which is a fall of 15%. That's not what we would hope to see.

Caveat Emptor

Not only did Tangrenshen Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥506m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CN¥262m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. For riskier companies like Tangrenshen Group 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.