Is Tai Kam Holdings (HKG:8321) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Tai Kam Holdings Limited (HKG:8321) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Tai Kam Holdings

What Is Tai Kam Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that Tai Kam Holdings had HK$13.5m in debt in October 2020; about the same as the year before. But on the other hand it also has HK$14.1m in cash, leading to a HK$628.0k net cash position.

How Healthy Is Tai Kam Holdings' Balance Sheet?

We can see from the most recent balance sheet that Tai Kam Holdings had liabilities of HK$42.3m falling due within a year, and liabilities of HK$308.0k due beyond that. Offsetting these obligations, it had cash of HK$14.1m as well as receivables valued at HK$81.7m due within 12 months. So it actually has HK$53.2m more liquid assets than total liabilities.

This luscious liquidity implies that Tai Kam Holdings' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Tai Kam Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Tai Kam Holdings's earnings that will influence how the balance sheet holds up in the future. 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 Tai Kam Holdings had a loss before interest and tax, and actually shrunk its revenue by 44%, to HK$126m. To be frank that doesn't bode well.

So How Risky Is Tai Kam Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Tai Kam Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$24m and booked a HK$8.2m accounting loss. Given it only has net cash of HK$628.0k, the company may need to raise more capital if it doesn't reach break-even 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. 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. To that end, you should learn about the 4 warning signs we've spotted with Tai Kam Holdings (including 2 which are potentially serious) .

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. 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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