Is Tungtex (Holdings) (HKG:518) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Tungtex (Holdings) Company Limited (HKG:518) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tungtex (Holdings)

What Is Tungtex (Holdings)'s Debt?

The image below, which you can click on for greater detail, shows that Tungtex (Holdings) had debt of HK$122.2m at the end of September 2020, a reduction from HK$170.7m over a year. However, it does have HK$372.5m in cash offsetting this, leading to net cash of HK$250.2m.

How Healthy Is Tungtex (Holdings)'s Balance Sheet?

The latest balance sheet data shows that Tungtex (Holdings) had liabilities of HK$329.7m due within a year, and liabilities of HK$12.4m falling due after that. Offsetting these obligations, it had cash of HK$372.5m as well as receivables valued at HK$81.3m due within 12 months. So it can boast HK$111.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that Tungtex (Holdings)'s balance sheet is just as strong as racists are weak. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Tungtex (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Tungtex (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.

Over 12 months, Tungtex (Holdings) made a loss at the EBIT level, and saw its revenue drop to HK$541m, which is a fall of 37%. To be frank that doesn't bode well.

So How Risky Is Tungtex (Holdings)?

While Tungtex (Holdings) lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$187m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The next few years will be important as the business matures. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Tungtex (Holdings) (1 is a bit unpleasant!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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