Is Ta Yang Group Holdings (HKG:1991) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Ta Yang Group Holdings Limited (HKG:1991) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ta Yang Group Holdings

What Is Ta Yang Group Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Ta Yang Group Holdings had HK$237.6m of debt in December 2020, down from HK$279.7m, one year before. However, because it has a cash reserve of HK$31.8m, its net debt is less, at about HK$205.8m.

How Healthy Is Ta Yang Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that Ta Yang Group Holdings had liabilities of HK$481.1m falling due within a year, and liabilities of HK$27.1m due beyond that. Offsetting these obligations, it had cash of HK$31.8m as well as receivables valued at HK$290.9m due within 12 months. So its liabilities total HK$185.4m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of HK$165.5m, 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. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ta Yang Group Holdings 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.

Over 12 months, Ta Yang Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$354m, which is a fall of 3.8%. We would much prefer see growth.

Caveat Emptor

Importantly, Ta Yang Group Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$73m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of HK$96m. And until that time we think this is a risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Ta Yang Group Holdings you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

When trading Ta Yang Group Holdings or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.