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 can see that Tong Kee (Holding) Limited (HKG:8305) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Tong Kee (Holding)
How Much Debt Does Tong Kee (Holding) Carry?
As you can see below, at the end of December 2020, Tong Kee (Holding) had HK$36.4m of debt, up from HK$32.3m a year ago. Click the image for more detail. However, it does have HK$23.6m in cash offsetting this, leading to net debt of about HK$12.7m.
How Strong Is Tong Kee (Holding)'s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Tong Kee (Holding) had liabilities of HK$97.7m due within 12 months and liabilities of HK$1.61m due beyond that. Offsetting these obligations, it had cash of HK$23.6m as well as receivables valued at HK$133.8m due within 12 months. So it can boast HK$58.1m more liquid assets than total liabilities.
This surplus strongly suggests that Tong Kee (Holding) has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Tong Kee (Holding) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Tong Kee (Holding) had a loss before interest and tax, and actually shrunk its revenue by 21%, to HK$173m. That makes us nervous, to say the least.
Caveat Emptor
Not only did Tong Kee (Holding)'s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$7.6m at the EBIT level. That said, we're impressed with the strong balance sheet liquidity. That should give the business time to grow its cashflow. The company is risky because it will grow into the future to get to profitability and free cash flow. 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. For example - Tong Kee (Holding) has 3 warning signs we think you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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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About SEHK:8305
Allurefem Holding
An investment holding company, operates as a multi-disciplinary contractor in the construction industry in Hong Kong.
Flawless balance sheet low.
