Tycoon Group Holdings (HKG:3390) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Tycoon Group Holdings Limited (HKG:3390) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Tycoon Group Holdings

What Is Tycoon Group Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Tycoon Group Holdings had HK$181.9m of debt, an increase on HK$151.1m, over one year. However, it does have HK$119.3m in cash offsetting this, leading to net debt of about HK$62.5m.

How Healthy Is Tycoon Group Holdings' Balance Sheet?

According to the last reported balance sheet, Tycoon Group Holdings had liabilities of HK$321.3m due within 12 months, and liabilities of HK$8.19m due beyond 12 months. On the other hand, it had cash of HK$119.3m and HK$126.0m worth of receivables due within a year. So it has liabilities totalling HK$84.1m more than its cash and near-term receivables, combined.

Since publicly traded Tycoon Group Holdings shares are worth a total of HK$1.32b, 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. 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 Tycoon Group Holdings 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.

Over 12 months, Tycoon Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$506m, which is a fall of 28%. To be frank that doesn't bode well.

Caveat Emptor

While Tycoon Group Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at HK$68m. 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 HK$26m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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 2 warning signs for Tycoon Group Holdings that you should be aware of before investing here.

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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