Tasty Concepts Holding (HKG:8096) Has Debt But No Earnings; Should You Worry?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Tasty Concepts Holding Limited (HKG:8096) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Tasty Concepts Holding

What Is Tasty Concepts Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Tasty Concepts Holding had HK$21.1m of debt, an increase on HK$1.85m, over one year. However, its balance sheet shows it holds HK$22.0m in cash, so it actually has HK$861.0k net cash.

How Strong Is Tasty Concepts Holding's Balance Sheet?

According to the last reported balance sheet, Tasty Concepts Holding had liabilities of HK$20.7m due within 12 months, and liabilities of HK$6.88m due beyond 12 months. Offsetting these obligations, it had cash of HK$22.0m as well as receivables valued at HK$2.31m due within 12 months. So it has liabilities totalling HK$3.30m more than its cash and near-term receivables, combined.

Since publicly traded Tasty Concepts Holding shares are worth a total of HK$150.0m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Tasty Concepts Holding also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 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 Tasty Concepts Holding had a loss before interest and tax, and actually shrunk its revenue by 9.2%, to HK$48m. That's not what we would hope to see.

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$3.1m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. Case in point: We've spotted 3 warning signs for Tasty Concepts Holding you should be aware of, and 1 of them doesn't sit too well with us.

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. 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.