Is TATA Health International Holdings (HKG:1255) Using Too Much 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.' 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. As with many other companies TATA Health International Holdings Limited (HKG:1255) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for TATA Health International Holdings

What Is TATA Health International Holdings's Debt?

As you can see below, at the end of June 2021, TATA Health International Holdings had HK$85.2m of debt, up from HK$71.3m a year ago. Click the image for more detail. However, it does have HK$56.9m in cash offsetting this, leading to net debt of about HK$28.3m.

How Healthy Is TATA Health International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TATA Health International Holdings had liabilities of HK$98.4m due within 12 months and liabilities of HK$50.3m due beyond that. On the other hand, it had cash of HK$56.9m and HK$76.9m worth of receivables due within a year. So its liabilities total HK$14.9m more than the combination of its cash and short-term receivables.

Of course, TATA Health International Holdings has a market capitalization of HK$315.7m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since TATA Health International 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, TATA Health International Holdings made a loss at the EBIT level, and saw its revenue drop to HK$149m, which is a fall of 35%. To be frank that doesn't bode well.

Caveat Emptor

While TATA Health International 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. Indeed, it lost a very considerable HK$98m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$17m in negative free cash flow over the last twelve months. So in short it's a really 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. For example, we've discovered 4 warning signs for TATA Health International Holdings (1 is significant!) that you should be aware of before investing here.

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.

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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