Does TUS International (HKG:872) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that TUS International Limited (HKG:872) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for TUS International

How Much Debt Does TUS International Carry?

The image below, which you can click on for greater detail, shows that at December 2020 TUS International had debt of HK$983.3m, up from HK$879.9m in one year. However, it does have HK$31.1m in cash offsetting this, leading to net debt of about HK$952.2m.

How Strong Is TUS International's Balance Sheet?

We can see from the most recent balance sheet that TUS International had liabilities of HK$1.24b falling due within a year, and liabilities of HK$213.0m due beyond that. Offsetting these obligations, it had cash of HK$31.1m as well as receivables valued at HK$184.9m due within 12 months. So its liabilities total HK$1.24b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the HK$210.5m 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, TUS International would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is TUS International's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year TUS International had a loss before interest and tax, and actually shrunk its revenue by 6.6%, to HK$730m. That's not what we would hope to see.

Caveat Emptor

Importantly, TUS International had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$196m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of HK$226m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. 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 TUS International you should be aware of, and 1 of them doesn't sit too well with us.

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. 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.
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