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 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. As with many other companies Tingyi (Cayman Islands) Holding Corp. (HKG:322) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Tingyi (Cayman Islands) Holding

What Is Tingyi (Cayman Islands) Holding's Debt?

The image below, which you can click on for greater detail, shows that at December 2019 Tingyi (Cayman Islands) Holding had debt of CN¥12.4b, up from CN¥10.8b in one year. But on the other hand it also has CN¥17.5b in cash, leading to a CN¥5.14b net cash position.

How Strong Is Tingyi (Cayman Islands) Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tingyi (Cayman Islands) Holding had liabilities of CN¥28.3b due within 12 months and liabilities of CN¥6.61b due beyond that. Offsetting this, it had CN¥17.5b in cash and CN¥2.47b in receivables that were due within 12 months. So it has liabilities totalling CN¥14.9b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Tingyi (Cayman Islands) Holding has a market capitalization of CN¥67.1b, 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. While it does have liabilities worth noting, Tingyi (Cayman Islands) Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Tingyi (Cayman Islands) Holding saw its EBIT drop by 3.8% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tingyi (Cayman Islands) Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.