Is China Tianrui Automotive Interiors (HKG: 6162) a risky investment?


Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Above all, China Tianrui Automotive Interiors Co., LTD (HKG: 6162) carries a debt. But the real question is whether this debt makes the business risky.

When is Debt a Problem?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest analysis for China Tianrui Automotive Interiors

What is the debt of China Tianrui Automotive Interiors?

The image below, which you can click for more details, shows that China Tianrui Automotive Interiors had a debt of CN 98.7 million at the end of June 2021, a reduction from CN’s 108.0 million over a year. However, he also had CN 26.2 million in cash, so his net debt was CN 72.5 million.

SEHK: 6162 Debt to equity history December 21, 2021

How strong is China Tianrui Automotive Interiors’ balance sheet?

We can see from the most recent balance sheet that China Tianrui Automotive Interiors had liabilities of CN 262.4 million due within one year, and liabilities of CN 16.2 million due beyond. In return, he had CN 26.2 million in cash and CN 274.9 million in receivables due within 12 months. Thus, he can boast of having 22.5 million CN in more liquid assets than total Liabilities.

This surplus suggests that China Tianrui Automotive Interiors has a prudent balance sheet and could likely eliminate its debt without too much difficulty.

We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt compared to EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

Looking at its 0.85 net debt over EBITDA and 5.9 times interest coverage, it seems to us that China Tianrui Automotive Interiors is probably using the debt in a fairly reasonable way. But the interest payments are certainly enough to make us think about how affordable his debt is. Unfortunately, China Tianrui Automotive Interiors’ EBIT actually fell 3.0% last year. If incomes continue to decline, managing that debt will be difficult, like delivering hot soup on a unicycle. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since China Tianrui Automotive Interiors will need revenue to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Finally, a business can only pay off its debts with hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Looking at the past three years, China Tianrui Automotive Interiors has actually experienced an overall cash outflow. Debt is typically more expensive and almost always riskier in the hands of a business with negative free cash flow. Shareholders should hope for improvement.

Our point of view

The conversion of EBIT to free cash flow from China Tianrui Automotive Interiors was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we thought its net debt to EBITDA was positive. When we consider all of the factors mentioned above, we feel a little cautious about the use of debt by China Tianrui Automotive Interiors. While debt has its advantage in potential higher returns, we believe shareholders should definitely consider how leverage levels might make the stock riskier. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 4 warning signs for China Tianrui Automotive Interiors you should know.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

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

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