Is Ta Yang Group Holdings (HKG:1991) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Ta Yang Group Holdings Limited (HKG:1991) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that 1991 is potentially overvalued!

What Is Ta Yang Group Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Ta Yang Group Holdings had HK$213.7m of debt, an increase on HK$58.9m, over one year. However, it also had HK$31.2m in cash, and so its net debt is HK$182.6m.

How Strong Is Ta Yang Group Holdings' Balance Sheet?

The latest balance sheet data shows that Ta Yang Group Holdings had liabilities of HK$300.5m due within a year, and liabilities of HK$234.9m falling due after that. On the other hand, it had cash of HK$31.2m and HK$165.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$339.0m.

Given this deficit is actually higher than the company's market capitalization of HK$304.5m, we think shareholders really should watch Ta Yang Group Holdings's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ta Yang Group Holdings'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.

In the last year Ta Yang Group Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 47%, to HK$384m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Ta Yang Group Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$130m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of HK$148m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Ta Yang Group Holdings (2 are significant) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.