Here's Why Trigiant Group (HKG:1300) Can Afford Some Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 note that Trigiant Group Limited (HKG:1300) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Trigiant Group

What Is Trigiant Group's Net Debt?

As you can see below, Trigiant Group had CN¥1.67b of debt at June 2023, down from CN¥1.83b a year prior. However, it does have CN¥540.0m in cash offsetting this, leading to net debt of about CN¥1.13b.

How Healthy Is Trigiant Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Trigiant Group had liabilities of CN¥1.87b due within 12 months and liabilities of CN¥25.3m due beyond that. Offsetting this, it had CN¥540.0m in cash and CN¥4.18b in receivables that were due within 12 months. So it actually has CN¥2.83b more liquid assets than total liabilities.

This surplus strongly suggests that Trigiant Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Trigiant Group'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.

Over 12 months, Trigiant Group made a loss at the EBIT level, and saw its revenue drop to CN¥2.6b, which is a fall of 5.3%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Trigiant Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥20m. Having said that, the balance sheet has plenty of liquid assets for now. That should give the business time to grow its cashflow. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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 Trigiant Group (1 is significant!) 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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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.