Here’s why China Tianrui Automotive Interiors (HKG:6162) has significant debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies China Tianrui Automotive Interiors Co., LTD (HKG:6162) uses debt. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.

Check out our latest analysis for China Tianrui Automotive Interiors

How much debt does China Tianrui Automotive Interiors have?

The image below, which you can click on for more details, shows that in December 2021, China Tianrui Automotive Interiors had a debt of 133.8 million Canadian yen, compared to 96.0 million Canadian yen in one year. year. On the other hand, he has 100.9 million Canadian yen in cash, resulting in a net debt of approximately 33.0 million domestic yen.

SEHK: 6162 Historical Debt to Equity April 6, 2022

How healthy is China Tianrui Automotive Interiors’ balance sheet?

According to the latest published balance sheet, China Tianrui Automotive Interiors had liabilities of 287.4 million Canadian yen due within 12 months and liabilities of 18.3 million domestic yen due beyond 12 months. In compensation for these obligations, it had cash of 100.9 million yen as well as receivables valued at 166.1 million yen due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 38.7 million Canadian yen.

This shortfall isn’t that bad, as China Tianrui Automotive Interiors is worth 165.7 million Canadian yen and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay debt.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

China Tianrui Automotive Interiors has a very low debt to EBITDA ratio of 0.93, so it’s odd to see low interest coverage, with last year’s EBIT being only 1.9x interest expense. interests. So, even if we are not necessarily alarmed, we think that his debt is far from trivial. It is important to note that the EBIT of China Tianrui Automotive Interiors has fallen by 75% over the last twelve months. If this decline continues, it will be more difficult to repay debts than to sell foie gras at a vegan convention. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of China Tianrui Automotive Interiors that will influence the balance sheet in the future. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.

Finally, a company can only repay its debts with cold hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, China Tianrui Automotive Interiors has had substantial negative free cash flow, overall. While investors no doubt expect a reversal of this situation in due course, this clearly means that its use of debt is more risky.

Our point of view

To be frank, China Tianrui Automotive Interiors’ conversion of EBIT to free cash flow and its history of (non-)growth in its EBIT makes us rather uncomfortable with its level of leverage. But at least it’s decent enough to manage its debt, based on its EBITDA; it’s encouraging. Looking at the big picture, it seems clear to us that China Tianrui Automotive Interiors’ use of debt creates risks for the business. If all goes well, this should boost returns, but on the other hand, the risk of permanent capital loss is increased by debt. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. We have identified 3 warning signs with China Tianrui Automotive Interiors, and understanding them should be part of your investment process.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.


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John A. Bogar