Would Tong Kee (Holding) (HKG:8305) Be Better Off With Less 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 Tong Kee (Holding) Limited (HKG:8305) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. 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)

What Is Tong Kee (Holding)'s Debt?

As you can see below, Tong Kee (Holding) had HK$32.3m of debt at June 2022, down from HK$38.2m a year prior. However, because it has a cash reserve of HK$6.57m, its net debt is less, at about HK$25.8m.

A Look At Tong Kee (Holding)'s Liabilities

According to the last reported balance sheet, Tong Kee (Holding) had liabilities of HK$101.6m due within 12 months, and liabilities of HK$902.0k due beyond 12 months. On the other hand, it had cash of HK$6.57m and HK$129.0m worth of receivables due within a year. So it can boast HK$33.1m 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Tong Kee (Holding) will need earnings to service that debt. 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 Tong Kee (Holding)'s revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Tong Kee (Holding) had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$10m. That said, we're impressed with the strong balance sheet liquidity. That will give the company some time and space to grow and develop its business as need be. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. Be aware that Tong Kee (Holding) is showing 6 warning signs in our investment analysis , and 4 of those can't be ignored...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.