Tong Kee (Holding) (HKG:8305) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Tong Kee (Holding) Limited (HKG:8305) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Tong Kee (Holding)

What Is Tong Kee (Holding)'s Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Tong Kee (Holding) had debt of HK$38.2m, up from HK$33.3m in one year. On the flip side, it has HK$12.1m in cash leading to net debt of about HK$26.1m.

How Strong Is Tong Kee (Holding)'s Balance Sheet?

The latest balance sheet data shows that Tong Kee (Holding) had liabilities of HK$94.6m due within a year, and liabilities of HK$998.0k falling due after that. Offsetting these obligations, it had cash of HK$12.1m as well as receivables valued at HK$134.4m due within 12 months. So it actually has HK$50.9m more liquid assets than total liabilities.

This excess liquidity is a great indication that Tong Kee (Holding)'s balance sheet is almost as strong as Fort Knox. 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.

Over 12 months, Tong Kee (Holding) made a loss at the EBIT level, and saw its revenue drop to HK$178m, which is a fall of 9.8%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Tong Kee (Holding) produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at HK$4.5m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Tong Kee (Holding) (of which 2 are a bit unpleasant!) you should know about.

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.
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