Is Trigiant Group (HKG:1300) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Trigiant Group Limited (HKG:1300) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Trigiant Group

What Is Trigiant Group's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Trigiant Group had debt of CN¥1.69b, up from CN¥1.27b in one year. However, it also had CN¥536.7m in cash, and so its net debt is CN¥1.15b.

How Strong Is Trigiant Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Trigiant Group had liabilities of CN¥1.82b due within 12 months and liabilities of CN¥24.5m due beyond that. Offsetting these obligations, it had cash of CN¥536.7m as well as receivables valued at CN¥4.10b due within 12 months. So it actually has CN¥2.79b more liquid assets than total liabilities.

This surplus liquidity suggests that Trigiant Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Trigiant Group shareholders face the double whammy of a high net debt to EBITDA ratio (32.1), and fairly weak interest coverage, since EBIT is just 0.31 times the interest expense. The debt burden here is substantial. Worse, Trigiant Group's EBIT was down 94% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Trigiant Group recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

Trigiant Group's EBIT growth rate was a real negative on this analysis, as was its interest cover. But its level of total liabilities was significantly redeeming. When we consider all the elements mentioned above, it seems to us that Trigiant Group is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Trigiant Group (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.