Tongfang Kontafarma Holdings (HKG:1312) 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.' 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. We can see that Tongfang Kontafarma Holdings Limited (HKG:1312) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Tongfang Kontafarma Holdings

How Much Debt Does Tongfang Kontafarma Holdings Carry?

As you can see below, at the end of December 2021, Tongfang Kontafarma Holdings had HK$246.2m of debt, up from HK$230.5m a year ago. Click the image for more detail. However, it also had HK$184.0m in cash, and so its net debt is HK$62.3m.

How Healthy Is Tongfang Kontafarma Holdings' Balance Sheet?

We can see from the most recent balance sheet that Tongfang Kontafarma Holdings had liabilities of HK$702.6m falling due within a year, and liabilities of HK$518.4m due beyond that. Offsetting these obligations, it had cash of HK$184.0m as well as receivables valued at HK$456.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$580.8m.

The deficiency here weighs heavily on the HK$318.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Tongfang Kontafarma Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tongfang Kontafarma Holdings'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 Tongfang Kontafarma Holdings had a loss before interest and tax, and actually shrunk its revenue by 4.8%, to HK$961m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Tongfang Kontafarma Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping HK$78m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of HK$15m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. We've identified 3 warning signs with Tongfang Kontafarma Holdings (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.