Tongguan Gold Group (HKG:340) Has A Pretty Healthy Balance Sheet

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.' 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. As with many other companies Tongguan Gold Group Limited (HKG:340) makes use of debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Tongguan Gold Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2025 Tongguan Gold Group had HK$653.6m of debt, an increase on HK$606.3m, over one year. But on the other hand it also has HK$780.3m in cash, leading to a HK$126.7m net cash position.

How Healthy Is Tongguan Gold Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tongguan Gold Group had liabilities of HK$1.49b due within 12 months and liabilities of HK$871.9m due beyond that. Offsetting this, it had HK$780.3m in cash and HK$287.9m in receivables that were due within 12 months. So it has liabilities totalling HK$1.30b more than its cash and near-term receivables, combined.

Of course, Tongguan Gold Group has a market capitalization of HK$10.1b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Tongguan Gold Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Tongguan Gold Group

Even more impressive was the fact that Tongguan Gold Group grew its EBIT by 210% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Tongguan Gold Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Tongguan Gold Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Tongguan Gold Group recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Tongguan Gold Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of HK$126.7m. And we liked the look of last year's 210% year-on-year EBIT growth. So we don't think Tongguan Gold Group's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Tongguan Gold Group insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.