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. We can see that Thiz Technology Group Limited (HKG:8119) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Thiz Technology Group
What Is Thiz Technology Group's Debt?
You can click the graphic below for the historical numbers, but it shows that Thiz Technology Group had HK$486.0k of debt in March 2019, down from HK$3.22m, one year before. However, its balance sheet shows it holds HK$29.5m in cash, so it actually has HK$29.0m net cash.
How Strong Is Thiz Technology Group's Balance Sheet?
According to the last reported balance sheet, Thiz Technology Group had liabilities of HK$9.32m due within 12 months, and liabilities of HK$3.90m due beyond 12 months. Offsetting this, it had HK$29.5m in cash and HK$2.78m in receivables that were due within 12 months. So it can boast HK$19.1m more liquid assets than total liabilities.
This surplus suggests that Thiz Technology Group is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Thiz Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Thiz Technology Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Thiz Technology Group reported revenue of HK$21m, which is a gain of 34%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Thiz Technology Group?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Thiz Technology Group had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through HK$8.1m of cash and made a loss of HK$8.2m. Given it only has net cash of HK$29.0m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Thiz Technology Group may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like Thiz Technology Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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