Is Tianjin Tianbao Energy Co., Ltd.’s (HKG:1671) Balance Sheet Strong Enough To Weather A Storm?
Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!
Zero-debt allows substantial financial flexibility, especially for small-cap companies like Tianjin Tianbao Energy Co., Ltd. (HKG:1671), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean 1671 has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
View our latest analysis for Tianjin Tianbao Energy
Does 1671’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. 1671’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. A single-digit revenue growth of 4.1% for 1671 is considerably low for a small-cap company. More capital can help the business grow faster. If 1671 is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can 1671 pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Tianjin Tianbao Energy has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. At the current liabilities level of CN¥136m, the company has been able to meet these commitments with a current assets level of CN¥236m, leading to a 1.74x current account ratio. For Electric Utilities companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Next Steps:
As a high-growth company, it may be beneficial for 1671 to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, 1671’s financial situation may change. This is only a rough assessment of financial health, and I’m sure 1671 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Tianjin Tianbao Energy to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 1671’s future growth? Take a look at our free research report of analyst consensus for 1671’s outlook.
Valuation: What is 1671 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 1671 is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
