Is Tasty Concepts Holding (HKG:8096) Using Debt Sensibly?

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.' 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. As with many other companies Tasty Concepts Holding Limited (HKG:8096) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tasty Concepts Holding

How Much Debt Does Tasty Concepts Holding Carry?

As you can see below, Tasty Concepts Holding had HK$23.4m of debt at March 2021, down from HK$30.3m a year prior. However, it does have HK$29.1m in cash offsetting this, leading to net cash of HK$5.70m.

How Strong Is Tasty Concepts Holding's Balance Sheet?

According to the last reported balance sheet, Tasty Concepts Holding had liabilities of HK$21.1m due within 12 months, and liabilities of HK$10.1m due beyond 12 months. Offsetting this, it had HK$29.1m in cash and HK$5.16m in receivables that were due within 12 months. So it can boast HK$3.18m more liquid assets than total liabilities.

This surplus suggests that Tasty Concepts Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tasty Concepts Holding 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 you can't view debt in total isolation; since Tasty Concepts Holding 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.

In the last year Tasty Concepts Holding had a loss before interest and tax, and actually shrunk its revenue by 26%, to HK$52m. That makes us nervous, to say the least.

So How Risky Is Tasty Concepts Holding?

While Tasty Concepts Holding lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$8.3m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 3 warning signs for Tasty Concepts Holding you should be aware of, and 1 of them is a bit unpleasant.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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