Is Trio Industrial Electronics Group (HKG:1710) Using Debt Sensibly?

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.' 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. We note that Trio Industrial Electronics Group Limited (HKG:1710) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Trio Industrial Electronics Group

What Is Trio Industrial Electronics Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Trio Industrial Electronics Group had HK$36.8m of debt, an increase on HK$23.0m, over one year. However, its balance sheet shows it holds HK$63.4m in cash, so it actually has HK$26.7m net cash.

How Healthy Is Trio Industrial Electronics Group's Balance Sheet?

According to the last reported balance sheet, Trio Industrial Electronics Group had liabilities of HK$244.2m due within 12 months, and liabilities of HK$12.7m due beyond 12 months. Offsetting this, it had HK$63.4m in cash and HK$172.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$20.7m.

Of course, Trio Industrial Electronics Group has a market capitalization of HK$150.0m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Trio Industrial Electronics Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Trio Industrial Electronics Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Trio Industrial Electronics Group wasn't profitable at an EBIT level, but managed to grow its revenue by 6.0%, to HK$744m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Trio Industrial Electronics Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Trio Industrial Electronics Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$21m of cash and made a loss of HK$11m. Given it only has net cash of HK$26.7m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Trio Industrial Electronics Group (including 1 which is potentially serious) .

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.