Does Tristate Holdings (HKG:458) 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.' 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. Importantly, Tristate Holdings Limited (HKG:458) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tristate Holdings

What Is Tristate Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tristate Holdings had HK$75.5m of debt in June 2023, down from HK$177.0m, one year before. But on the other hand it also has HK$240.1m in cash, leading to a HK$164.6m net cash position.

How Strong Is Tristate Holdings' Balance Sheet?

The latest balance sheet data shows that Tristate Holdings had liabilities of HK$1.10b due within a year, and liabilities of HK$816.3m falling due after that. Offsetting this, it had HK$240.1m in cash and HK$623.0m in receivables that were due within 12 months. So its liabilities total HK$1.05b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$475.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Tristate Holdings would likely require a major re-capitalisation if it had to pay its creditors today. Tristate Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

It is well worth noting that Tristate Holdings's EBIT shot up like bamboo after rain, gaining 53% in the last twelve months. That'll make it easier to manage its debt. 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 Tristate Holdings 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Tristate Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Tristate Holdings recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Tristate Holdings does have more liabilities than liquid assets, it also has net cash of HK$164.6m. And it impressed us with its EBIT growth of 53% over the last year. So although we see some areas for improvement, we're not too worried about Tristate Holdings's balance sheet. 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. To that end, you should learn about the 3 warning signs we've spotted with Tristate Holdings (including 1 which shouldn't be ignored) .

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. 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.