Thelloy Development Group (HKG:1546) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Thelloy Development Group Limited (HKG:1546) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Thelloy Development Group

What Is Thelloy Development Group's Debt?

As you can see below, at the end of March 2021, Thelloy Development Group had HK$30.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has HK$91.3m in cash, leading to a HK$61.3m net cash position.

How Healthy Is Thelloy Development Group's Balance Sheet?

The latest balance sheet data shows that Thelloy Development Group had liabilities of HK$131.9m due within a year, and liabilities of HK$189.0k falling due after that. Offsetting these obligations, it had cash of HK$91.3m as well as receivables valued at HK$19.6m due within 12 months. So its liabilities total HK$21.2m more than the combination of its cash and short-term receivables.

Since publicly traded Thelloy Development Group shares are worth a total of HK$184.0m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Thelloy Development Group also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Thelloy Development Group'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.

In the last year Thelloy Development Group had a loss before interest and tax, and actually shrunk its revenue by 72%, to HK$152m. To be frank that doesn't bode well.

So How Risky Is Thelloy Development Group?

Although Thelloy Development Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$21m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 4 warning signs for Thelloy Development Group you should be aware of, and 1 of them is concerning.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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