Health Check: How Prudently Does Xinjiang Tianye Water Saving Irrigation System (HKG:840) Use Debt?

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. As with many other companies Xinjiang Tianye Water Saving Irrigation System Company Limited (HKG:840) makes use of debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Xinjiang Tianye Water Saving Irrigation System's Debt?

The image below, which you can click on for greater detail, shows that Xinjiang Tianye Water Saving Irrigation System had debt of CN¥99.8m at the end of June 2025, a reduction from CN¥104.0m over a year. But it also has CN¥360.3m in cash to offset that, meaning it has CN¥260.5m net cash.

A Look At Xinjiang Tianye Water Saving Irrigation System's Liabilities

We can see from the most recent balance sheet that Xinjiang Tianye Water Saving Irrigation System had liabilities of CN¥664.3m falling due within a year, and liabilities of CN¥114.6m due beyond that. Offsetting these obligations, it had cash of CN¥360.3m as well as receivables valued at CN¥270.0m due within 12 months. So its liabilities total CN¥148.7m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥94.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Xinjiang Tianye Water Saving Irrigation System would probably need a major re-capitalization if its creditors were to demand repayment. Given that Xinjiang Tianye Water Saving Irrigation System has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Xinjiang Tianye Water Saving Irrigation System's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

View our latest analysis for Xinjiang Tianye Water Saving Irrigation System

In the last year Xinjiang Tianye Water Saving Irrigation System had a loss before interest and tax, and actually shrunk its revenue by 65%, to CN¥801m. To be frank that doesn't bode well.

So How Risky Is Xinjiang Tianye Water Saving Irrigation System?

Although Xinjiang Tianye Water Saving Irrigation System had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥115m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Xinjiang Tianye Water Saving Irrigation System you should be aware of, and 1 of them can't be ignored.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.