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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Tian Teck Land Limited (HKG:266) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Tian Teck Land
What Is Tian Teck Land's Net Debt?
The chart below, which you can click on for greater detail, shows that Tian Teck Land had HK$201.9m in debt in March 2019; about the same as the year before. However, its balance sheet shows it holds HK$566.6m in cash, so it actually has HK$364.8m net cash.
How Strong Is Tian Teck Land's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Tian Teck Land had liabilities of HK$244.3m due within 12 months and liabilities of HK$282.1m due beyond that. On the other hand, it had cash of HK$566.6m and HK$16.5m worth of receivables due within a year. So it actually has HK$56.8m more liquid assets than total liabilities.
Having regard to Tian Teck Land's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the HK$4.06b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Tian Teck Land has more cash than debt is arguably a good indication that it can manage its debt safely.
But the other side of the story is that Tian Teck Land saw its EBIT decline by 4.5% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Tian Teck Land 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.