Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Tian Chang Group Holdings Ltd. (HKG:2182) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Tian Chang Group Holdings

What Is Tian Chang Group Holdings's Net Debt?

As you can see below, Tian Chang Group Holdings had HK$118.3m of debt at June 2019, down from HK$288.5m a year prior. But it also has HK$122.4m in cash to offset that, meaning it has HK$4.09m net cash.

How Strong Is Tian Chang Group Holdings's Balance Sheet?

The latest balance sheet data shows that Tian Chang Group Holdings had liabilities of HK$350.8m due within a year, and liabilities of HK$54.2m falling due after that. Offsetting these obligations, it had cash of HK$122.4m as well as receivables valued at HK$91.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$191.2m.

This deficit isn't so bad because Tian Chang Group Holdings is worth HK$334.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. 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, Tian Chang Group Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Tian Chang Group Holdings grew its EBIT by 256% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Tian Chang Group Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.