The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Tu Yi Holding Company Limited (HKG:1701) does carry debt. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Tu Yi Holding
How Much Debt Does Tu Yi Holding Carry?
You can click the graphic below for the historical numbers, but it shows that Tu Yi Holding had CN¥56.9m of debt in June 2022, down from CN¥62.8m, one year before. However, because it has a cash reserve of CN¥31.6m, its net debt is less, at about CN¥25.2m.
How Healthy Is Tu Yi Holding's Balance Sheet?
The latest balance sheet data shows that Tu Yi Holding had liabilities of CN¥42.7m due within a year, and liabilities of CN¥37.2m falling due after that. Offsetting this, it had CN¥31.6m in cash and CN¥1.29m in receivables that were due within 12 months. So its liabilities total CN¥47.0m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Tu Yi Holding is worth CN¥109.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Tu Yi Holding'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 Tu Yi Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to CN¥24m. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
While we can certainly appreciate Tu Yi Holding's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping CN¥29m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥23m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Tu Yi Holding (1 is a bit concerning!) 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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About SEHK:1701
Tu Yi Holding
An investment holding company, operates as an outbound travel package and service provider in the People’s Republic of China and Japan.
Excellent balance sheet and fair value.