Does Tai Kam Holdings (HKG:8321) Have A Healthy Balance Sheet?

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.' 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 Tai Kam Holdings Limited (HKG:8321) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Tai Kam Holdings

What Is Tai Kam Holdings's Debt?

The chart below, which you can click on for greater detail, shows that Tai Kam Holdings had HK$13.4m in debt in April 2021; about the same as the year before. But it also has HK$27.0m in cash to offset that, meaning it has HK$13.6m net cash.

How Strong Is Tai Kam Holdings' Balance Sheet?

We can see from the most recent balance sheet that Tai Kam Holdings had liabilities of HK$38.5m falling due within a year, and liabilities of HK$62.0k due beyond that. Offsetting these obligations, it had cash of HK$27.0m as well as receivables valued at HK$95.8m due within 12 months. So it can boast HK$84.3m more liquid assets than total liabilities.

This excess liquidity is a great indication that Tai Kam Holdings' 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. Simply put, the fact that Tai Kam Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Tai Kam Holdings 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.

Over 12 months, Tai Kam Holdings made a loss at the EBIT level, and saw its revenue drop to HK$138m, which is a fall of 29%. That makes us nervous, to say the least.

So How Risky Is Tai Kam Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Tai Kam Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$23m of cash and made a loss of HK$12m. With only HK$13.6m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Tai Kam Holdings (1 is concerning) you should be aware of.

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.

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